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Table of Contents

[**Executive Summary** 3](#executive-summary)

[**I. Introduction** 5](#i.-introduction)

[**II. Overview of Voluntary Flexible Agreements**
6](#ii.-overview-of-voluntary-flexible-agreements)

[Legislative Requirements 6](#legislative-requirements)

[Standard Guaranty Agency Model 7](#standard-guaranty-agency-model)

[VFA Modifications to the Standard Guaranty Agency Model
7](#vfa-modifications-to-the-standard-guaranty-agency-model)

[Evaluation Criteria 8](#evaluation-criteria)

[Cost Neutrality and Reductions 8](#cost-neutrality-and-reductions)

[**III. Summary of Voluntary Flexible Agreements**
9](#iii.-summary-of-voluntary-flexible-agreements)

[**ASA Voluntary Flexible Agreement**
9](#asa-voluntary-flexible-agreement)

[Internal Agency Changes 11](#internal-agency-changes)

[Current Activities 11](#current-activities)

[Early Results 12](#early-results)

[Cost Projections of VFA 13](#cost-projections-of-vfa)

[Term of VFA 14](#term-of-vfa)

[**CSAC Voluntary Flexible Agreement**
14](#csac-voluntary-flexible-agreement)

[Internal Agency Changes 16](#internal-agency-changes-1)

[Current Activities 16](#current-activities-1)

[Early Results 18](#early-results-1)

[Cost Projections of VFA 18](#cost-projections-of-vfa-1)

[Term of VFA 20](#term-of-vfa-1)

[**GLHEGC Voluntary Flexible Agreement**
20](#glhegc-voluntary-flexible-agreement)

[Internal Agency Changes 21](#internal-agency-changes-2)

[Current Activities 22](#current-activities-2)

[Early Results 24](#early-results-2)

[Cost Projections of VFA 24](#cost-projections-of-vfa-2)

[Term of VFA 25](#term-of-vfa-2)

[**TGSLC Voluntary Flexible Agreement**
26](#tgslc-voluntary-flexible-agreement)

[Current Activities 26](#current-activities-3)

[Early Results 31](#early-results-3)

[Cost Projections of VFA 31](#cost-projections-of-vfa-3)

[Term of VFA 33](#term-of-vfa-3)

[**IV.** **Evaluating Impacts of VFA**
33](#iv.-evaluating-impacts-of-vfa)

[**V. Appendices** 34](#v.-appendices)

# **Executive Summary**

This report reviews the selection and current status of the Voluntary
Flexible Agreements (VFAs) between the United States Department of
Education (ED) and certain guaranty agencies in the Federal Family
Education Loan (FFEL) program. VFAs incorporate and modify the existing
FFEL agreements between ED and the participating guaranty agencies.
Established by the Higher Education Amendments of 1998 (P.L. 105-244)
(HEA Amendments), the new agreements test new and innovative methods for
carrying out the types of activities currently required of guaranty
agencies in order to find more efficient and effective means of managing
the FFEL program. This report fulfills the requirement to report on VFA
progress to Congress as required by the 1998 HEA Amendments.

There are four active FFEL guarantors that have entered into VFAs with
ED:

-   American Student Assistance \[ASA\]

-   California Student Aid Commission \[CSAC\]

-   Great Lakes Higher Education Guaranty Corporation \[GLHEGC\]

-   Texas Guaranteed Student Loan Corporation \[TGSLC\]

The Secretary published a notice in the [Federal]{.underline}
[Register]{.underline} on July 28, 1999, inviting proposals for VFAs
from all interested guaranty agencies. Nine proposals were submitted and
evaluated on the basis of various criteria including transferability,
efficiency, use of new technology, and expected benefits. After
extensive negotiations on the terms of the agreements, ED determined
that the four agreements that were selected were cost-neutral, as
required by section 428A(b)(2)(B) of the Higher Education Act of 1965,
as amended (HEA).

Each of the four VFAs tests different innovations within the FFEL
program. The innovations have a common theme -- to improve the
efficiency of collections and to shift incentives from back-end
collection of defaulted loans to the avoidance of defaults in the first
place. Specifically,

1.  ASA's VFA focuses on "portfolio wellness" \-- an initiative that
    promotes the idea that an improved relationship between the borrower
    and the loan servicer or guaranty agency can remedy default and
    delinquency problems;

2.  CSAC's VFA implements programs that place a greater emphasis on
    default prevention and improving the collection process;

3.  GLHEGC's VFA replaces all of the Federal payments to the agency with
    a single performance-based fee indexed to the agency's ability to
    get delinquent borrowers to make payments and avert default; and

4.  TGSLC's VFA comprehensively modifies its payment structure to tie
    payments to improved performance, with increased emphasis on
    pre-delinquency and default aversion, in addition to locating,
    rehabilitating, and collecting on defaulted loans.

If successful, these approaches will support ED's overall goal to
improve the integrity of the loan program through continued reductions
in defaults.

ED has established common, general measures for evaluating the
performance of each VFA over the coming year. These include:

-   analyzing default and delinquency rates to determine whether the
    VFAs have had a positive effect on lowering these rates;

-   determining if the VFAs strengthen or weaken the overall financial
    structure of the guaranty agencies; and

-   assessing the ability of guaranty agencies and ED to effectively
    administer the program without guaranty agency reserves.

ED will also determine whether the terms and conditions established in
each VFA process are scalable and transferable to the wider FFEL
community. Additionally, ED will consult lenders and schools
participating in each guaranty agency's program to determine how they
are affected by VFAs. FFEL program participants have expressed concern
that there may be unintended consequences for their business processes
as a result of the implementation of the agreements. ED will also
consult with guaranty agencies that are not participating in a VFA to
determine if the agreements have had an adverse impact on other guaranty
agencies.

The VFA project, as envisioned by the 1998 HEA Amendments, anticipated
no more than 6 initial agreements in 1999 and a final report submitted
to Congress regarding the impact of the programs on program integrity,
program and cost efficiencies, and availability of aid three years
later. The VFA with GLHEGC was signed on November 27, 2000. Secretary
Paige signed the additional three agreements in March 2001.
Consequently, insufficient time has elapsed since the VFAs were approved
to assess the impact of the agreements, and ED cannot draw any
meaningful conclusions at this time. ED, however, is providing an
interim report, and will provide another report on September 30, 2002.

# **I. Introduction**

This interim report reviews the selection and current status of the VFAs
between guarantors and ED. The legislation requires the Secretary to
report on the impact of VFAs to the Senate Committee on Health,
Education, Labor, & Pensions and the House Committee on Education and
the Workforce. Specifically, the statute requires that the report
include --

1.  a description of each VFA and the performance goals established
    under each agreement;

2.  a list of each participating guaranty agency and the specific
    waivers granted to each agency and other guaranty agencies under
    section 428A(a)(2) of the HEA;

3.  a description of the standards for measuring a guaranty agency's
    performance under the VFA and ED's evaluation of each agency's
    performance relative to those standards; and

4.  an analysis of the fees paid by ED and the cost efficiencies
    achieved under each agreement.

    Four FFEL guaranty agencies have entered into VFAs with ED. They
    are, in alphabetical order:

5.  American Student Assistance \[ASA\], the designated guarantor for
    the Commonwealth of Massachusetts and the District of Columbia;

6.  California Student Aid Commission \[CSAC\], the designated guarantor
    for California;

7.  Great Lakes Higher Education Guaranty Corporation \[GLHEGC\], the
    designated guarantor for Wisconsin, Ohio, Minnesota, and Puerto
    Rico; and

8.  Texas Guaranteed Student Loan Corporation \[TGSLC\], the designated
    guarantor for Texas.

    The report provides:

9.  a brief overview of the terms of the VFA authority;

10. the process ED followed in entering into the agreements;

11. the specific terms and conditions of each of the four individual
    agreements; and

12. the performance measures that ED will use to determine the impact of
    VFAs on program integrity, program and cost efficiencies, and the
    availability and delivery of student financial aid.

# **II. Overview of Voluntary Flexible Agreements**

VFAs are intended to test new and innovative methods for carrying out
the types of activities currently required of guaranty agencies under
the Higher Education Act of 1965, as amended (HEA), in order to find
more efficient and effective means of managing the FFEL program.

## Legislative Requirements

The HEA Amendments authorized the Secretary of Education to enter into
voluntary, flexible agreements with guaranty agencies that would replace
the standard agency agreements. The law allowed for no more than six
VFAs during the fiscal years 1999, 2000 and 2001. Beginning in fiscal
year 2002, the law allows any guaranty agency or consortium of agencies
to enter into a VFA with the Secretary.

The statute allows the Secretary to waive or modify any requirements
covered by the standard agency agreement, except statutory requirements
pertaining to the terms and conditions of student loans or payment of
lenders' default claim payments. Additionally, the Secretary may not
waive the prohibition on inducements unless the Secretary determines
that the waiver is consistent with the objectives of the VFA authority,
and the waiver is limited to activities in the states where the guaranty
agency is the designated guarantor.[^1] *See* Section 428A(a)(1)(B) of
the HEA.

VFAs may only include terms that cover the following activities:

-   administering the issuance of insurance on loans;

-   monitoring insurance commitments;

-   default aversion activities;

-   review of default claims made by lenders;

-   payment of default claims;

-   collection of defaulted loans;

-   adoption of internal systems of accounting, auditing and program
    reporting to the Secretary on a timely and accurate basis;

-   timely and accurate collection and reporting of data to the
    Secretary;

-   monitoring of institutions and lenders;

-   informational outreach to schools and students in support of access
    to higher education;

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-   fees the Secretary shall pay;

-   use of net revenues to support postsecondary education;

-   standards by which the guaranty agency's performance will be
    assessed;

-   termination of the agreements;

-   other business activities previously purchased or developed; and

-   such other provisions as the Secretary determines to be necessary to
    protect the United States from the risk of unreasonable loss and to
    promote the purposes of the program. (*See* Appendix B, Text of VFA
    reports for a detailed list of statutory and regulatory waivers).

## Standard Guaranty Agency Model

Under the standard model, guaranty agencies have numerous functions
including, but not limited to: insurance of loans, assistance in
bringing delinquent borrowers current and averting defaults, processing
of default claims, discharging debts for death and disability, and
collection on defaulted loans.

A guaranty agency pays default claims to lenders for 98 percent of the
defaulted loan amount from the Federal Fund, which is the property of
the United States, but is maintained by the guaranty agency. ED
reimburses the Federal Fund for up to 95 percent of the amount of each
default claim paid. The guaranty agency must deposit most of the funds
collected on defaulted loans into the Federal Fund. The agency can
transfer from the Federal Fund to its Operating Fund a default aversion
fee of 1 percent of the loan balance for which a lender has requested
assistance from the agency on a delinquent account. This fee is
refundable to the Federal Fund if the loan ultimately defaults.

A guaranty agency has an Operating Fund to pay for its day-to-day
activities. ED pays the guaranty agency a loan processing and issuance
fee based on the new loans disbursed, and an account maintenance fee
based on the outstanding loans insured. The guaranty agency is also
entitled to keep up to 24 percent of the amount collected on defaulted
loans, and 18.5 percent of the amount repaid through consolidation loans
and the amount of loans on which the borrower rehabilitates the default,
to defray its collections costs.

## VFA Modifications to the Standard Guaranty Agency Model

VFAs provide an opportunity to test new and innovative methods for
carrying out the types of activities currently required under the
standard model in order to find more efficient and effective means of
managing the FFEL program. The VFA proposals expressed a desire to
examine alternatives to the current standard guaranty agency model and
its fee and revenue structure. ED received proposals from nine guaranty
agencies wishing to take part in the VFA program. After evaluating these
proposals against the statutory criteria and federal fiscal interests,
ED selected six agencies for further negotiations as the legislation
allows. Each VFA proposal included innovative approaches. Ultimately,
final agreements were reached with four of those guarantors.

1.  ASA is testing portfolio "wellness", the concept that the borrower
    is a customer and that an improved relationship between the borrower
    and the guaranty agency or lender is the key to ameliorating the
    ills of delinquency and default.

2.  CSAC is placing more emphasis on default prevention by working with
    borrowers earlier in the life cycle of the loan. CSAC is also
    revamping its claims and collections process to be more efficient
    and effective. From the resulting savings, outreach services will be
    enhanced to promote educational opportunity and responsible
    borrowing.

3.  GLHEGC has replaced all federal revenue streams with a single
    performance-based fee indexed to its ability to "cure", or repair,
    delinquencies.

4.  TGSLC has a comprehensive modification to its payment structure to
    tie payment to improved performance, with increased emphasis on
    pre-delinquency and default aversion, in addition to locating,
    rehabilitating and collecting on defaulted loans.

## Evaluation Criteria

ED is evaluating the impact of VFAs on program integrity, program and
cost efficiencies, and the availability and delivery of student
financial assistance. These measurements will include the following:

-   overall fees and other costs paid by ED compared to those costs
    under the standard model over the "life of the loan";

-   the extent to which default and delinquency rates have been reduced;

-   the extent to which VFAs strengthen or weaken the overall financial
    structure of the guaranty agencies;

-   the extent to which the terms in VFAs are scalable and transferable
    to the wider FFEL community;

-   the effect on key internal guaranty agency functions such as claims
    payment and monitoring lenders and institutions for program
    compliance; and

-   the extent to which the VFAs improve guaranty agency reporting to
    ED.

## Cost Neutrality and Reductions {#cost-neutrality-and-reductions .unnumbered}

ED projected the cost to the government associated with each agreement.
This projection included a Federal cost summary for each agreement, as
well as more detailed tables showing projected cash flows for specific
agency operating revenues and expenses under the current and proposed
agreements. Under these projections, ED determined that none of the
agreements would exceed the cost to the Secretary under the standard
guaranty agency model.[^2]

These estimates do not assume changes in historical borrower behavior.
For example, absent specific evidence of the effectiveness of default
reduction and collection improvement proposals, no changes in borrower
behavior \-- i.e., default and collection patterns \-- are assumed.
Nevertheless, each VFA focuses on default prevention, so to the extent
they produce successful results in changing borrower behavior, there
could be a cost savings to the government over the "life of the loan."

It is also important to note that the guaranty agencies' Federal Funds
are already recorded as Federal assets; accordingly, the return of these
funds to the Treasury is not considered as an offset against new or
increased Federal payments to an agency. Conversely, increased payments
from the Federal Fund into agency operating funds are considered as
increased Federal costs.

# **III. Summary of Voluntary Flexible Agreements** {#iii.-summary-of-voluntary-flexible-agreements .unnumbered}

#  {#section .unnumbered}

# **ASA Voluntary Flexible Agreement** {#asa-voluntary-flexible-agreement .unnumbered}

The VFA with ASA is intended to test the concept of portfolio
"wellness", a new idea of the role of the guarantor within the FFEL
program. This concept is based on the premise that the appropriate role
of the guarantor is to assist students in successfully completing a
program of higher education financing and repayment. As such, a
guarantor's role is to effectively manage the portfolio of FFEL loans
that it guarantees. Further, the concept is based on the view that the
borrower is a customer of the guarantor, and that building a positive,
interactive relationship with the borrower is key to successful
portfolio management. The ASA VFA intends to test the effectiveness of
this approach by improving the quantity and quality of interactions with
the borrower.

+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Performance    | **Regular GA**        | **ASA VFA**           |   |
|   | Stage**          |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Origination**  | **Guarantee Fee Loan  | **Loan Processing and |   |
|   |                  | Processing and        | Issuance Fee (LPIF)** |   |
|   |                  | Issuance Fee (LPIF)** |                       |   |
|   |                  |                       | -   Monthly           |   |
|   |                  | -   0.65% of          |                       |   |
|   |                  |     Disbursement      | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  | -   0.40% FY2003      | ```                   |   |
|   |                  |                       | -   0.65% of          |   |
|   |                  |                       |     Disbursement      |   |
|   |                  |                       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   0.40% FY2003      |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **In-Sc          | **Account Maintenance |                       |   |
|   | hool/Repayment** | Fee (AMF)**           |                       |   |
|   |                  |                       |                       |   |
|   |                  | -   0.10% of          |                       |   |
|   |                  |     Outstanding       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Loans in Good  |                       | ## P                  |   |
|   | Standing**       |                       | ortfolio Wellness Fee |   |
|   |                  |                       |                       |   |
|   |                  |                       | -   Baseline Fee --   |   |
|   |                  |                       |     Monthly           |   |
|   |                  |                       |                       |   |
|   |                  |                       | -   Variable Fee -    |   |
|   |                  |                       |     Annual            |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Delinquency**  | **Flat Default        | **Default Aversion**  |   |
|   |                  | Aversion Fee (DAF)**  |                       |   |
|   |                  |                       | -   Monthly           |   |
|   |                  | -   No rebills        |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  | ```{=html}            | <!-- -->              |   |
|   |                  | <!-- -->              | ```                   |   |
|   |                  | ```                   | -   18.5% of          |   |
|   |                  | -   Refund defaults   |     rehabilitated and |   |
|   |                  |                       |     consolidated      |   |
|   |                  |                       |     loans that        |   |
|   |                  |                       |     avoided default   |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Default**      | **95% Reinsurance**   | **100% Payment of     |   |
|   |                  |                       | Claims**              |   |
|   |                  | -   Loan Loss         |                       |   |
|   |                  |                       | -   Weekly Claims     |   |
|   |                  | -   Reserve in        |     Advanced by ED    |   |
|   |                  |     Federal Fund      |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   Escrow of         |   |
|   |                  |                       |     Reserves          |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Collections**  | **Flat Retention**    | ## Flat Retention     |   |
|   |                  |                       |                       |   |
|   |                  | -   24% of Straight   | -   Monthly           |   |
|   |                  |     Collections       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  | -   18.5% of          | <!-- -->              |   |
|   |                  |     rehabilitated and | ```                   |   |
|   |                  |     consolidated      | -   18.5% of          |   |
|   |                  |     loans             |     collections on    |   |
|   |                  |                       |     defaulted,        |   |
|   |                  |                       |     rehabilitated and |   |
|   |                  |                       |     consolidated      |   |
|   |                  |                       |     loans             |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+

The agreement shifts the primary revenue source away from collections on
defaulted loans and toward maintaining borrowers in good standing. Under
the terms of the ASA VFA many of the standard guarantor revenue sources
are replaced with a Portfolio Wellness Fee. The Portfolio Wellness Fee
consists of two components: a baseline fee of 22 basis points per year
on all loans that are maintained in good standing; and a variable fee
associated with improving the default rate of ASA-guaranteed loans.

The terms of the agreement eliminate the payments to ASA of the Account
Maintenance Fee (AMF) of 10 basis points of the original principal
amount of outstanding loans and the Default Aversion Fee of 1 percent of
the outstanding loan balance, and reduce the percentage of collections
it may retain from 24% to 18.5%. The terms of the agreement with ASA
also include the deposit of the agency's Federal Fund into a limited
access escrow account and the elimination of risk sharing on the part of
the guarantor.

Under the terms of the VFA, ED makes payments to ASA only for loans that
are in *good standing*; the agreement defines a loan in *good standing*
as a loan:

-   for which the lender has not requested default aversion assistance;

-   that is not in a default status;

-   that has not been cancelled as a result of death or permanent
    disability; and

-   that has not been paid in full.

Because it is critical that all information on the loans be accurate,
the ASA VFA provides for reductions in the Portfolio Wellness Fee for
each data integrity target not met by ASA. These targets are based on
standards set by ED, and cover both the information reported by ASA to
the National Student Loan Data System (NSLDS) and data reported to ED on
the standard guaranty agency reports.

## 

## 

## Internal Agency Changes

ASA is undertaking a program of cultural change and structural
reorganization based on the wellness concept and the terms of the VFA.
The agency has also created both an ombudsman and a Borrower Advocacy
Unit to move away from a traditional collection operation to borrower
counseling. These new internal units are intended to assist borrowers
with the various processes in the FFEL program. This shift is expected
to increase the timely resolution of borrower issues and reduce
complaints to ED, congressional offices and the Massachusetts Office of
the Attorney General.

ASA has also established a strong working relationship with the
Educational Opportunity Centers (EOCs) in Massachusetts and the District
of Columbia. EOCs are funded under ED's TRIO program, and provide
counseling and information on college admissions and financial aid to
individuals in areas with high concentrations of low-income families and
first generation college students. The relationship helps ASA provide
face-to-face counseling services to borrowers who require more personal
assistance. The partnership between ASA and the EOCs attempts to
leverage the Federal financial resources already being spent in TRIO and
the FFEL program for financial aid dissemination, counseling and default
management.

Portfolio management, through a new Borrower Services Division, is now
the core operational unit within ASA, with a primary mission to assist
students in successfully financing their education and completing
repayment of their loans. The portfolio management unit will:

1.  develop a core competence in delinquency and default reduction tools
    and services;

2.  form strategic alliances with other business partners and customers
    to provide expanded repayment options and debt counseling services;

3.  partner with loan servicers to establish positive relationships with
    borrowers; and;

4.  implement plans and methods to increase rehabilitation of loans that
    default.

## Current Activities

One of ASA's first initiatives is what it calls the *Bright Beginnings*
program, which focuses on positive communications that encourage
defaulted borrowers to solve their loan problems. In this first
campaign, ASA targets defaulted borrowers who have not made a payment on
their defaulted loan in the last 45 to 120 days. ASA designed a
direct-mail campaign that provides information in a simplified and
positive tone that contrasts with the usual tone of loan collection
communication. ASA's payment advisory representatives also contact the
borrowers directly in an attempt to increase the likelihood that they
will rehabilitate their loans. Once the borrower has completed the
rehabilitation process by affirming the debt and making the required
number of consecutive payments, the loans are sold to a new lender. The
ASA VFA permits the rehabilitation process to be completed in a minimum
of nine months, rather than twelve, which results in increased revenue
and direct savings to the Federal government. ED expects that this
concerted effort in default aversion and rehabilitation will improve
recoveries over the standard FFEL rehabilitation process and result in
an overall net savings to ED.

The communications concepts embodied in the *Bright Beginnings* program
are also being expanded to delinquent borrowers before they default.
Under the standard model, guarantors' only interactions with borrowers
are at the time of loan origination, and if the borrower enters into
delinquency and, subsequently, if the borrower defaults. Borrowers in
repayment primarily interact with loan servicers, and therefore ASA
intends to partner with servicers to test various communication
methodologies and relationship-building efforts.

In September 2001, ASA and AFSA Data Corporation, a large national
servicer, entered into an agreement to focus on mutual borrower
communication efforts. Both ASA and AFSA are implementing technology
solutions to improve their ability to share information on borrowers.
The two organizations will work together to improve communication with
borrowers, share information and discuss solutions to specific borrower
problems. For example, the agencies will set up a telephone link system
that will enable a default aversion representative working with a
borrower at ASA to transfer the call directly to AFSA. By creating this
connection, the default aversion representative will be able to discuss
the borrower's issues and discuss possible solutions directly with the
servicer. Both ASA and AFSA also intend to share notes on borrower
contacts so that continuity in information may be maintained between the
organizations.

ASA and AFSA will begin a series of pilot projects focusing on different
population types within their mutual portfolio. Through its partnership
with the servicer, ASA will test the effectiveness of different
communication methods for different borrower populations and different
periods in the loan process, from grace period to late-stage
delinquency. Once the most effective communication mechanisms are
identified, ASA will implement them for the broader portfolio. ASA's
goal is to develop processes that allow guarantors and servicers to work
together with the borrower to avoid repayment problems.

## Early Results

ASA has collected early results from several of the initiatives under
the VFA. Although there has been insufficient time to draw conclusions,
initial evidence indicates that the improved strategies have had a
positive impact on encouraging defaulted loan borrowers to repay their
student loans. For instance, approximately 25 percent of the population
targeted by the *Bright Beginnings* program responded to the messages.
Of those who responded, approximately 95 percent rehabilitated and ASA
achieved a 15 percent improvement in the overall retention rate of
borrowers making qualifying payments for rehabilitation.

## Cost Projections of VFA

ED estimated that the ASA proposal would not increase program costs. The
replacement of the current account maintenance and default aversion fees
with a portfolio wellness fee tied to improvements in agency default
rates relative to the national average is estimated to cost \$6 million
more than the two fees that it replaced from FY 2001 through 2003.
However, this increase is offset by a reduction in ASA's retention of
collections from 24 percent to 18.5 percent. This change is estimated to
reduce guaranty agency revenues by \$7 million between FY 2001 and 2003,
producing a net savings of at least \$1 million. If ASA does not meet
certain data reporting standards, however, the wellness fee will be
reduced.

The wellness fee is calculated as a percentage of the original principal
balance of outstanding non-defaulted loans guaranteed by ASA, less loans
for which lenders had applied for default aversion assistance. The
baseline fee of 22 basis points would increase as ASA's default rate
improves relative to the national average. For purposes of estimating
costs under the VFA, ED assumed no improvement in ASA's default
performance. However, if ASA's default performance improves, savings may
be generated.

  --------------------------------------- -------------------- -------------------- -------------------- ------------------------
  **Federal Cost Summary (amounts in                                                                     
  millions) -- ASA VFA Proposal**                                                                        

  Fiscal Year                                                                                            

                                          [2001]{.underline}   [2002]{.underline}   [2003]{.underline}   [FY
                                                                                                         2001-2003]{.underline}

  **Current Services**                                                                                   

                                                                                                         

  **Federal Costs**                                                                                      

  GA Retention                            18                   19                   21                   58

  Portfolio Maintenance Fee               7                    8                    8                    23

  Default Aversion Fee                    4                    4                    4                    12

                                                                                                         

  **Federal Revenues**                                                                                   

  Gross Collections                       106                  114                  122                  342

                                                                                                         

  **Net Federal Cost**                    -77                  -83                  -89                  -249

                                                                                                         

                                                                                                         

  **VFA Model**                                                                                          

                                                                                                         

  **Federal Costs**                                                                                      

  GA Retention                            16                   17                   18                   51

  Portfolio Wellness Fee                  15                   13                   13                   41

                                                                                                         

  **Federal Revenues**                                                                                   

  Gross Collections                       106                  114                  122                  342

                                                                                                         

  **Net Federal Cost**                    -75                  -84                  -91                  -250

  Change from Current Services            2                    -1                   -2                   -1
  --------------------------------------- -------------------- -------------------- -------------------- ------------------------

## Term of VFA

The ASA VFA will expire on September 30, 2003 unless both parties choose
to extend it. Either the guaranty agency or ED may terminate the
agreement by giving written notice of at least 90 days. If the VFA
expires or is terminated, ED would reinstate the prior, standard
guaranty agency agreement. ASA would then be required to comply with the
reserve requirements under sections 422, 422A and 428 of the HEA, and
any additional requirements required by the Secretary to ensure the
efficient transfer of responsibilities back to the standard model. ASA
would remain a FFEL guaranty agency and payments would revert back to
those provided in the standard financing model.

The ASA agreement also includes the return of the Federal Fund to ED.
These funds are currently being held in escrow to ensure that these
monies are available if the agreement is terminated or expires and ASA
reverts to the standard guaranty agency agreement.

# **CSAC Voluntary Flexible Agreement**

The VFA between ED and CSAC is designed to allow CSAC to implement new
initiatives to improve service to student borrowers and their families,
reduce costs to the federal taxpayer, and develop customized programs
designed to aid at-risk borrowers. The CSAC VFA seeks to add value to
the existing FFEL program, be clearly measurable and manageable, and
enable CSAC and its partners to better serve students and schools. Each
initiative now being developed at the agency is intended to be scalable
and transferable to other FFEL program participants.

The CSAC VFA is based on the concept that developing and sustaining
sound debt management practices benefits all borrowers and lowers the
costs of defaults. Under the VFA, CSAC uses a portion of the federal
costs saved through lower defaults to fund a two-pronged approach to
increasing awareness and lowering costs: a robust program of debt
management education for students and borrowers; and early education
initiatives to promote educational opportunity, responsible borrowing
and default prevention.

CSAC's VFA is designed to achieve a variety of improvements to the FFEL
program, including:

-   the use of predictive modeling for the early identification of
    borrowers at high risk of default;

-   consolidated delinquency processing by a single entity to reduce
    borrower confusion and duplicated efforts and test the use of a
    single point of contact for delinquency intervention;

-   replacement of existing due diligence rules with flexible,
    performance-based standards to leverage best practices and emerging
    technologies in collections;

-   the use of expanded, focused opportunities for Income Contingent
    Repayment through ED's Direct Consolidation Loans to help at-risk
    borrowers avoid loan default;

```{=html}
<!-- -->
```
-   the use of modified post-default collection activities to increase
    collection efficiency and default recoveries; and

-   the implementation of changes to its program review structure to
    reduce duplication and the resulting burden to schools and lenders.

    The CSAC VFA is predicated on the concept that it is preferable to
    have guaranty agencies concentrate on processes that avert defaults
    rather than rely on post-default collections. To that end, the
    guarantor is in the process of implementing measures that avert
    defaults and reduce operational expenses. These measures could
    significantly reduce operational costs -- particularly in the areas
    of claim processing and post-default recovery -- while maintaining
    or improving the performance of the guarantor.

+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Performance    | **Regular GA**        | **CSAC VFA**          |   |
|   | Stage**          |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Origination**  | **Guarantee Fee Loan  | **Loan Processing and |   |
|   |                  | Processing and        | Issuance Fee (LPIF)** |   |
|   |                  | Issuance Fee (LPIF)** |                       |   |
|   |                  |                       | -   Monthly           |   |
|   |                  | -   0.65% of          |                       |   |
|   |                  |     Disbursement      | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  | -   0.40% FY2003      | ```                   |   |
|   |                  |                       | -   0.65% of          |   |
|   |                  |                       |     Disbursement      |   |
|   |                  |                       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   0.40% FY2003      |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **In-Sc          | **Account Maintenance | **Account Maintenance |   |
|   | hool/Repayment** | Fee (AMF)**           | Fee (AMF)**           |   |
|   |                  |                       |                       |   |
|   |                  | -   0.10% of          | -   Monthly           |   |
|   |                  |     Outstanding       |                       |   |
|   |                  |                       | -   0.10% of          |   |
|   |                  |                       |     Outstanding       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Loans in Good  |                       |                       |   |
|   | Standing**       |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Delinquency**  | **Flat Default        | **Default Aversion    |   |
|   |                  | Aversion Fee (DAF)**  | Fee (DAF)**           |   |
|   |                  |                       |                       |   |
|   |                  | -   No rebills        | -   Annual            |   |
|   |                  |                       |                       |   |
|   |                  | ```{=html}            | ```{=html}            |   |
|   |                  | <!-- -->              | <!-- -->              |   |
|   |                  | ```                   | ```                   |   |
|   |                  | -   Refund defaults   | -   0.50% of savings  |   |
|   |                  |                       |     in claim payments |   |
|   |                  |                       |     resulting from    |   |
|   |                  |                       |     default aversion  |   |
|   |                  |                       |     activities        |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Default**      | **95% Reinsurance**   | **95% Reinsurance**   |   |
|   |                  |                       |                       |   |
|   |                  | -   Loan Loss         | -   Loan Loss         |   |
|   |                  |                       |                       |   |
|   |                  | -   Reserve in        | -   Reserve in        |   |
|   |                  |     Federal Fund      |     Federal Fund      |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Collections**  | **Flat Retention**    | **Variable            |   |
|   |                  |                       | Retention -           |   |
|   |                  | -   24% of Straight   | Collection Recovery   |   |
|   |                  |     Collections       | Rate Improvement      |   |
|   |                  |                       | Fee**                 |   |
|   |                  | -   18.5% of          |                       |   |
|   |                  |     rehabilitated and | -   Annual            |   |
|   |                  |     consolidated      |                       |   |
|   |                  |     loans             | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   Fee based on      |   |
|   |                  |                       |     improvement in    |   |
|   |                  |                       |     CSAC\'s           |   |
|   |                  |                       |     collection        |   |
|   |                  |                       |     recovery rate     |   |
|   |                  |                       |     compared to the   |   |
|   |                  |                       |     national average  |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+

## Internal Agency Changes {#internal-agency-changes-1 .unnumbered}

Under the VFA, CSAC proposed implementation of a single point of contact
for delinquency servicing to work with lenders to develop a centralized
and efficient process for borrower contact and information flow. The
initiative allows for performance-based changes to the due diligence
activities required by ED's regulations to test whether lenders can
reduce the historical annual default rate if they are allowed
flexibility in the methods available for collection activity. The
creation of a single point of contact with the borrower is intended to
eliminate the confusion and inefficiency that occurs in the present
system in which guarantors and lenders both contact delinquent borrowers
during the default aversion process. Through this initiative, the
guarantor will provide lenders with the greatest possible latitude in
proposing and performing new collection methods or activities. Focus
group surveys conducted by CSAC indicate that the availability of
current and comprehensive information from one source, including loan
balances and servicer contact information, may help to reduce the
incidence of loan default. It is intended that this initiative will help
reduce delinquency and claim processing costs for lenders, servicers,
and guarantors, while also reducing default liabilities for lenders,
guarantors, and ED.

To evaluate the effect of the single point of contact system, CSAC will
provide a comparison of current practices versus new initiatives if any
lender and/or servicer elects to collaborate with the guaranty agency on
this proposal. This will allow for innovation while also maintaining a
control group for comparative analysis. CSAC will also monitor the
delinquency rate for participating lenders or servicers prior to and
following the adoption of the single source service initiative. As of
the publication of this report, discussions were underway with at least
three lenders who have indicated interest in this initiative. The
opportunity to participate is extended to all participating lenders and
servicers.

## Current Activities

CSAC has implemented an Early Withdrawal Counseling program to identify
those students who withdraw from educational programs prior to
completing their educational program and provide them with counseling on
debt management, repayment options, employment counseling, and other
services that may encourage positive repayment behavior.

CSAC is utilizing an analysis of data about defaulted borrowers and a
predictive scoring model to identify borrowers at high risk of default.
This research indicates that early withdrawal is a powerful determinant
of eventual default. Contacting borrowers as early as possible after
their separation from school, and providing counseling on the various
options available, should reduce the likelihood that these students will
become delinquent and default.

Under the program, CSAC will identify the reason for withdrawal and
customize programs to address delinquency risks. Borrowers armed with
better information on what remedies and programs are available to them
should show less of a propensity to default. CSAC believes that early
contact with these borrowers can avoid unintentional missed payments.

The ultimate goal of the project is to avert potential defaults. To that
end, CSAC will track the number and percentage of such borrowers who do
not enter delinquency, and compare the impact of early withdrawal
counseling on the entire portfolio. Furthermore, the counseling
activities, techniques, and resources used to prevent delinquency or
assist in retention will be tracked to determine the efforts involved in
successful default aversion activities. CSAC will also assess the
ultimate cost benefit of these activities and outcomes.

The Consolidation Project under the VFA provides those borrowers who are
struggling with repayment of their student debt and can benefit from an
income-contingent repayment option with a streamlined process to
consolidate their loans under the William D. Ford Direct Loan (DL)
program. The FFEL program does not provide an income contingent loan
repayment plan for borrowers, an option that is available to borrowers
under the DL program. This consolidation project will identify borrowers
at high risk of default, educate and assist them in making informed
educational loan decisions, and, where appropriate facilitate the
consolidation process into the DL program. Under the VFA, ED has agreed
to work with CSAC to streamline this consolidation process.

To determine the success of this program, CSAC will assess the value of
providing borrowers a variety of consolidation information and
application materials. The agency will also assess whether counseled
borrowers consider consolidation applications for FFEL only, DL only, or
both FFEL and DL. CSAC will also assist borrowers to determine the most
expedient or borrower-preferred method of referral to DL consolidation.
The guarantor will further measure the effectiveness of referral methods
to DL consolidation. Project success will ultimately be determined by
the number of individuals who obtained Direct Consolidation Loans and
have avoided default.

CSAC has implemented performance-based collection standards in order to
develop innovative tools for increasing collections on defaulted loans
through account scoring and portfolio analysis. Under the VFA, ED waived
current post-default due diligence requirements to spur innovation in
the methods used to improve the process for contacting defaulted
borrowers and collecting on loans. To the extent CSAC improves its
performance in collections above the national average, the guarantor is
allowed to keep an increased percentage of its collection recoveries.

The measurement of success for this initiative will be based on data
retrieved from several different reports generated from the CSAC
collection system. This data will measure the number of calls made to
the borrower, the contact rate, and the total revenue generated. The
guarantor has also developed a scoring model to assess the accounts in
the default portfolio. The scoring model will be used to ensure that the
most collectable accounts will be turned over to loan collectors on a
schedule that will ensure they receive timely attention.

The VFA also permits CSAC to seek to exchange out-of-state borrower
accounts to other guaranty agencies for California borrower accounts to
facilitate the use of state data and tools in collection activities.
This initiative allows guaranty agencies to trade a similar portfolio of
student loans with the intent of using state-based proprietary
employment data to assist in collection efforts. CSAC is seeking to
exchange defaulted accounts with other guaranty agencies according to
established exchange criteria designed to increase the potential for
collection due to factors such as location or state-specific enforcement
authority.

Lastly, under the Streamlined Program review section of the VFA, CSAC
will work with ED and other guaranty agencies to reduce the number of
redundant lender and school audits and program costs. After discussions
with ED, CSAC eliminated two duplicate reviews. Once the new lender
review cycle begins on January 1, 2002, CSAC will work with other
guaranty agencies to eliminate redundant lender reviews.

##  {#section-3 .unnumbered}

## Early Results {#early-results-1 .unnumbered}

CSAC is collecting early results from several of the proposals. Early
data collected by the guarantor shows a 20% increase in the contact
rate, leading to increased collections of over \$750,000 for the months
of April, May and June 2001 over the same time period in 2000. From
these preliminary positive results, CSAC plans to expand the use of this
scoring model to substantially improve default recoveries while ensuring
that an appropriate and consistent level of effort is applied to all
accounts at all levels of the scoring model. The program will be
monitored, and appropriate adjustments will be made based on future
needs, additional information, or changes in requirements.

## Cost Projections of VFA {#cost-projections-of-vfa-1 .unnumbered}

The two new payment streams negotiated into the CSAC VFA are designed to
trigger payment based on CSAC's performance as measured at the end of
the fiscal year. Payment to the guarantor is not made unless
improvements are recorded through data collection standards to the
default rate and recovery rate. CSAC continues to receive the same
guaranty agency payment streams as those guarantors outside the VFA
program. There is an allowance to pay the default aversion fee, at an
earlier date to pilot the early-withdrawal counseling program. This
transaction occurs between guarantor accounts, however, and not between
ED and CSAC. Payments made under the CSAC VFA will be paid at the end of
each fiscal year.

CSAC's VFA provides that the agency will retain 50 percent of any
federal savings from "averted default claims." Averted default claims
would be calculated based on the difference between the default rate of
the guarantor---total default claims divided by total dollars in
repayment---and 3 percent. Since ED's estimates do not assume changes in
historical borrower behavior, including reduced claim levels, this
proposal was estimated as cost neutral.

Additionally, CSAC's retention of all default collections increases by
one percent for each one- percent improvement in the collection rate of
the agency. In order to receive this additional benefit, CSAC's
collection rate would have to exceed the national average recovery rate.
Since ED's estimates do not assume changes in historical borrower
behavior, including increases in collection recoveries, this proposal
was estimated cost neutral.

Lastly, under the early withdrawal-counseling program, CSAC transfers
the default

aversion fee at the time the counseling is beginning instead of at the
time the lender

requests assistance. Because CSAC is operating this program on a pilot
basis, no significant costs have been attributed to this provision.

  ------------------------------------ -------------------- -------------------- -------------------- ------------------------
  **Federal Cost Summary (amounts in                                                                  
  millions) -- CSAC VFA Proposal**                                                                    

  Fiscal Year                                                                                         

                                       [2001]{.underline}   [2002]{.underline}   [2003]{.underline}   [FY
                                                                                                      2001-2003]{.underline}

                                                                                                      

  **Current Services**                                                                                

                                                                                                      

  **Federal Costs**                                                                                   

  GA Retention                         35                   37                   40                   112

  Portfolio Maintenance Fee            12                   13                   13                   38

  Default Aversion Fee                 6                    6                    6                    18

                                                                                                      

  **Federal Revenues**                                                                                

  Gross Collections                    207                  222                  239                  668

                                                                                                      

  **Net Federal Cost**                 -154                 -166                 -180                 -500

  **VFA Model**                                                                                       

                                                                                                      

  **Federal Costs**                                                                                   

  GA Retention                         35                   37                   40                   112

  Portfolio Maintenance Fee            12                   13                   13                   38

  Default Aversion Fee                 6                    6                    6                    18

  Early Withdrawal Fee                 0                    0                    0                    0

                                                                                                      

  **Federal Revenues**                                                                                

  Gross Collections                    207                  222                  239                  668

                                                                                                      

  **Net Federal Cost**                 -154                 -166                 -180                 -500

  Change from Current Services         0                    0                    0                    0
  ------------------------------------ -------------------- -------------------- -------------------- ------------------------

##  {#section-4 .unnumbered}

##  {#section-5 .unnumbered}

## Term of VFA {#term-of-vfa-1 .unnumbered}

The CSAC VFA is automatically renewed for successive one-year periods at
the end of each fiscal year unless or until written notice is provided
by either ED or CSAC to terminate the agreement. Either the guarantor or
ED, however, may terminate the agreement by giving written notice of
termination. In the event of expiration or the termination of the VFA,
ED reinstates the prior, standard guaranty agency agreement. CSAC would
then be required to comply with the reserve requirements under sections
422, 422A and 428 of the HEA, and any additional requirements mandated
by the Secretary to ensure the efficient transfer of responsibilities
back to the standard model. CSAC would remain a FFEL guaranty agency and
payments would revert back to those provided in the standard financing
model.

#  {#section-6 .unnumbered}

# **GLHEGC Voluntary Flexible Agreement** {#glhegc-voluntary-flexible-agreement .unnumbered}

The intent of the VFA between GLHEGC and ED is to extend and improve a
pilot program previously initiated by ED and the guarantor. In 1996, ED
and GLHEGC began a Default Aversion Pilot to test a payment plan that
would provide incentives for the guarantor to improve its default
aversion efforts. The VFA expands the scope of the default aversion
pilot by implementing a complete fee-for-service payment structure that
replaces current guaranty agency revenues with a single,
performance-based fee. It also provides for experimentation with varying
delinquency due diligence models and develops a post-claim auditing
process to replace the current claim-by-claim review approach.

+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Performance    | **Regular GA**        | **Great Lakes VFA**   |   |
|   | Stage**          |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Origination**  | **Guarantee Fee Loan  | **Included in Default |   |
|   |                  | Processing and        | Aversion Performance  |   |
|   |                  | Issuance Fee (LPIF)** | Based Fee (PBF)**     |   |
|   |                  |                       |                       |   |
|   |                  | -   0.65% of          | LPIF payment process  |   |
|   |                  |     Disbursement      | used by ED to make    |   |
|   |                  |                       | partial payment of    |   |
|   |                  | -   0.40% FY2003      | PBF                   |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **In-Sc          | **Account Maintenance | **Included in Default |   |
|   | hool/Repayment** | Fee (AMF)**           | Aversion Performance  |   |
|   |                  |                       | Based Fee (PBF)**     |   |
|   |                  | -   0.10% of          |                       |   |
|   |                  |     Outstanding       | AMF payment process   |   |
|   |                  |                       | used by ED to make    |   |
|   |                  |                       | partial payment of    |   |
|   |                  |                       | PBF                   |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Loans in Good  |                       |                       |   |
|   | Standing**       |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Delinquency**  | **Flat Default        | **Default Aversion    |   |
|   |                  | Aversion Fee (DAF)**  | Performance Based Fee |   |
|   |                  |                       | (PBF)**               |   |
|   |                  | -   No rebills        |                       |   |
|   |                  |                       | Loans Outstanding     |   |
|   |                  | ```{=html}            | times a sliding fee   |   |
|   |                  | <!-- -->              | based on periodic     |   |
|   |                  | ```                   | referred delinquent   |   |
|   |                  | -   Refund defaults   | account cure rate     |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Default**      | **95% Reinsurance**   | **100% Payment of     |   |
|   |                  |                       | Claims**              |   |
|   |                  | -   Loan Loss         |                       |   |
|   |                  |                       | -   Weekly Claims     |   |
|   |                  | -   Reserve in        |     Advanced by ED    |   |
|   |                  |     Federal Fund      |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   Escrow of         |   |
|   |                  |                       |     Reserves          |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Collections**  | **Flat Retention**    | **Flat Retention**    |   |
|   |                  |                       |                       |   |
|   |                  | -   24% of Straight   | -   Net Collection    |   |
|   |                  |     Collections       |     Costs             |   |
|   |                  |                       |                       |   |
|   |                  | -   18.5% of          |                       |   |
|   |                  |     rehabilitated and |                       |   |
|   |                  |     consolidated      |                       |   |
|   |                  |     loans             |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+

## Internal Agency Changes

In an attempt to eliminate the current incentive for guarantors to
emphasize post-default loan collection rather than default aversion, the
GLHEGC VFA provides a performance-based, fee-for-service model. Under
the VFA, GLHEGC will not receive any of the payments currently provided
under the standard guaranty agency financing structure, including
default aversion fees, account maintenance fees, loan processing and
issuance fees, and collection retention in excess of actual collection
costs. Rather, payment is calculated using a fee matrix and cure rate
calculation based on the performance of the guarantor in default and
delinquency prevention. The VFA between the guarantor and ED emphasizes
default aversion activities and reduction of defaulted loans. It also
rewards the agency for reducing the costs to ED for claims payments on
defaulted loans. The VFA provides for a single fee based directly on
default aversion performance \-- the higher the cure rate, the higher
the reimbursement to GLHEGC.

The VFA fee is tied directly to the rate at which GLHEGC is able to
"cure" delinquent loans by moving them back into repayment. This is
calculated for payment purposes using two factors. The first is a cure
rate that ties to a basis-point fee on a payment schedule included in
the VFA. The higher the cure rate, the higher the basis point fee paid
to GLHEGC. The second factor is the original principal balance of open
loans. This outstanding loan balance is the same amount used to
calculate AMF payments under the standard guarantor payment model.
Multiplying the cure rate by the loan balance produces the amount of
reimbursement for agency activities owed to the guarantor.

GLHEGC's cure rate is measured quarterly and the calculation includes
loans that are either cured or default during the period being measured.
Loan forgiveness "purchases" such as death, bankruptcy, and total and
permanent disability are not included in the cure rate calculation. The
numerator is the total number of loans cured; the denominator is the sum
of the total of loans cured and the total number of loans defaulted.

The claim payment process under the GLHEGC VFA financial model has been
modified to provide for weekly fund transfers from ED to match the
amount of outstanding claim payments to lenders. Under the VFA, ED
reimburses 100% of claim payments. All collection recoveries are
remitted to ED, which reimburses Great Lakes for its actual post-default
collection related costs. Thus, the guarantor does not retain the
difference between the statutorily established collection retention and
the actual costs of collection. The terms of the agreement with GLHEGC
also include the deposit of the agency's Federal Fund into a limited
access escrow account and the elimination of risk sharing on the part of
the guarantor.

GLHEGC has implemented several initiatives intended to avert defaults
based on the development of new electronic methods to contact customers.
To maximize the impact of these technological improvements, the
guarantor is evaluating, redesigning and reengineering processes to
accommodate new technologies. As processes are identified and enhanced,
GLHEGC will recruit, train, and develop agency staff in using the new
technologies and processes.

These internal initiatives are an extension of the default aversion
pilot program of 1996-98. During that period, GLHEGC, in partnership
with ED, tested methods of preventing defaults and experimented with
different payment and fee structures. This was an early attempt to
emphasize results, not process, in the guaranty agency model, and served
as the incubator for many of the present initiatives contained in the
GLHEGC VFA.

GLHEGC has installed a new predictive dialer platform and "right party
contact" software. This new platform, combined with software that uses
past calling history with borrowers to identify the right time to reach
them, is intended to increase borrower contacts over the course of the
pilot. Early results have shown increased borrower contacts since
implementation of this system.

Another new feature is automated messaging. Part of the new dialer
platform, this system leaves an automated message for the borrower
requesting a return call when the auto-dialer encounters an answering
machine. This was intended to spur an increase in efficiency for agency
account representatives by reducing the time required to leave messages
with borrowers.

In an effort to improve borrower counseling and assistance, GLHEGC has
also taken steps to improve the hiring and training of its customer
service staff. The guarantor has implemented measures to better identify
those employees who are best able to work effectively with customers.
GLHEGC has also improved its training to better ensure that the
employees work well with customers to help them avert defaults.

# [Current Activities]{.smallcaps} {#current-activities-2 .unnumbered}

GLHEGC's proactive forbearance initiative is intended to impact
borrowers that the guarantor could not contact and who are in the later
stages of delinquency. The GLHEGC guaranty system automatically
identifies borrowers who had not previously used two years of
forbearance. The agency created a cover letter explaining the
forbearance process and the importance of contacting the guarantor with
any questions or concerns. The letter also includes a forbearance
agreement for the borrower to sign and return.

The GLHEGC VFA allows the guarantor to pilot a new approach to the
claims review process. At present, guarantors manually review default
claims on a claim-by-claim basis. While a small percentage of claims are
rejected and others are charged interest penalties, the incidence of
these types of penalties is relatively infrequent and has little impact
on the ability to collect on a loan.

To this end, the guarantor has implemented a post-claim sampling process
consistent with generally accepted auditing standards to replace the
current claim-by-claim process. This effort will test if more
sophisticated and cost effective sampling processes produce acceptable
results. This is a similar approach to the Blanket Certificate of
Guaranty procedure that has already been successfully implemented at the
front-end of the loan process in the standard guaranty agency model.

GLHEGC has also created a dedicated team of claim examination staff to
redirect the attention of claim examiners from verifying the performance
of required collection activities to identification of additional
default aversion activities that the guarantor can perform. Claim
examiners develop and retain a broad level of expertise and are often
able to identify borrowers who may benefit from alternative default
aversion efforts.

GLHEGC has also begun to notify the borrower when a default claim is
received and loaded into the GLHEGC system. This letter notifies the
borrower that the lender's claim has been received and will soon be
paid. The letter details the adverse consequences of default and
encourages the borrower to contact the guarantor immediately for
assistance. This letter, mailed in a uniquely designed envelope, has
prompted many borrowers to call GLHEGC to resolve their delinquent
status prior to default.

During this fiscal year, GLHEGC plans to implement several additional
default aversion initiatives.

-   **Enhanced Accessibility for Account Representatives -** Account
    representatives will be able to facilitate on-line "web chats" with
    borrowers, as well as offer borrowers "click for call" options to
    contact the agency.

-   **Payment Processing over Telephone/Internet** -The guaranty agency
    is working to offer borrowers the option to make student loan
    payments over the telephone or over the Internet.

-   **Proactive Unemployment Deferments -** Similar to its current
    proactive forbearance program, GLHEGC will identify those borrowers
    with serious delinquencies that the agency has been unable to reach
    by telephone. If eligible for an unemployment deferment, the
    guarantor will send these borrowers a cover letter and a blank
    deferment form to help them avoid default.

-   **Delinquency Research -** GLHEGC will continue its research into
    factors that contribute to long-term delinquencies and on methods to
    get these borrowers back into repayment.

    GLHEGC also intends to test the concept of shared due diligence
    efforts to determine how guarantors, lenders and servicers can
    improve the quality and efficiency of their collaboration. The
    guarantor intends to test methods that eliminate duplicative
    processes and improve upon the present level of success achieved
    through current guarantor-lender partnership models. Provided
    existing levels of performance can be maintained, further
    discussions may lead to an increase in efficiency and a decrease in
    program costs.

## Early Results {#early-results-2 .unnumbered}

GLHEGC has implemented over 20 separate initiatives during the first
year of the VFA. Some of the results include a 20 percent increase in
borrower contact due to GLHEGC's Sunday Evening Borrower Contact Program
and strengthened autodialer. Early results reported by GLHEGC on
automated messaging are inconclusive. The guarantor had hoped the new
functionality would greatly increase the number of incoming calls
received. However, at this stage of implementation no increase has
occurred. GLHEGC is now reviewing further process improvement steps.

Additionally, in a one-year test of the Claims Cure Action Team, the
guarantor discovered that ten percent of accounts referred to the
default aversion department for follow-up were brought back into
repayment. In the coming year under the VFA program, GLHEGC intends to
continue implementation and analysis of the various default aversion
initiatives. GLHEGC will also continue its ongoing monitoring and
continuous improvement efforts. The guarantor is also committed to
sharing its experience with the FFEL community.

##  {#section-7 .unnumbered}

## Cost Projections of VFA {#cost-projections-of-vfa-2 .unnumbered}

GLHEGC's VFA replaces current agency revenue sources, including loan
processing and issuance fees, account maintenance fees, default aversion
fees, and retention on default collections, with a single performance
based fee tied to the success of the agency's default aversion efforts.
A pilot default aversion program run by GLHEGC in FY 1997-98 resulted in
an average cure rate of 80.1 percent. ED has assumed that this rate will
be maintained in future years, translating into a .274 percent
performance based fee, which will cost \$125 million over FY 2001-03.
While the net result of these changes actually showed a slight increase
in federal costs, the proposal was deemed to be cost neutral due to the
fact that the increase was very small and well within the margin of
error for estimating total federal costs.

  --------------------------------------------- -------------------- -------------------- -------------------- ------------------------
  **Federal Cost Summary (amounts in millions)                                                                 
  -- GLHEGC VFA Proposal**                                                                                     

  Fiscal Year                                                                                                  

                                                [2001]{.underline}   [2002]{.underline}   [2003]{.underline}   [FY
                                                                                                               2001-2003]{.underline}

                                                                                                               

  **Current Services**                                                                                         

                                                                                                               

  **Federal Costs**                                                                                            

  Collection Retention                          24                   26                   28                   78

  Loan Processing and Issuance Fee              11                   12                   13                   36

  Portfolio Maintenance Fee                     15                   15                   16                   46

  Default Aversion Fee                          7                    7                    8                    22

  Investment Income Paid from Restricted        1                    2                    0                    3
  Account                                                                                                      

                                                                                                               

  **Federal Revenues**                                                                                         

  Insurance Premiums                            1                    1                    1                    3

  Gross Collections                             [142]{.underline}    [153]{.underline}    [164]{.underline}    [459]{.underline}

                                                                                                               

  **Net Federal Cost**                          -85                  -92                  -100                 -277

                                                                                                               

                                                                                                               

  **VFA Model**                                                                                                

                                                                                                               

  **Federal Costs**                                                                                            

  Collection Retention                          0                    0                    0                    0

  Loan Processing and Issuance Fee              0                    0                    0                    0

  Portfolio Maintenance Fee                     0                    0                    0                    0

  Performance Based Fee under VFA               40                   42                   43                   125

  Default Aversion Fee                          0                    0                    0                    0

  Investment Income Paid from Restricted        0                    0                    0                    0
  Account                                                                                                      

  ED Contract Collection Costs                  19                   20                   22                   61

                                                                                                               

  **Federal Revenues**                                                                                         

  Insurance Premiums                            1                    1                    1                    3

  Gross Collections                             [142]{.underline}    [153]{.underline}    [164]{.underline}    [459]{.underline}

                                                                                                               

  **Net Federal Cost**                          -84                  -92                  -100                 -276

  Change from Current Services                  1                    0                    0                    1
  --------------------------------------------- -------------------- -------------------- -------------------- ------------------------

## Term of VFA {#term-of-vfa-2 .unnumbered}

The GLHEGC VFA is automatically renewed for successive one-year periods
at the end of each fiscal year unless or until written notice is
provided by either ED or GLHEGC to terminate the agreement. As the VFA
legislation requires, if the VFA is terminated , the prior, standard
guaranty agency agreement with GLHEGC will be restored. GLHEGC would be
required to comply with the reserve requirements under sections 422,
422A and 428 of the HEA, and any additional requirements required by the
Secretary to ensure the efficient transfer of responsibilities back to
the standard model. GLHEGC would remain a FFEL guaranty agency and
payments would revert to those provided in the standard financing model.

Additionally, part of the negotiated structure of the GLHEGC agreement
was the return of the Federal Fund to ED. In order to insure these
monies would be available to replenish the agency fund in the event the
guarantor returned to the standard guaranty agency agreement an escrow
account was created. The full amount of this account will be promptly
returned to GLHEGC, including \$5 million previously placed on deposit
with ED by GLHEGC in connection with the joint ED/GLHEGC default
aversion pilot of FY 1996 through 1998. However, ED will debit the fund
of any outstanding funds owed to either ED or the United States under
the terms of the HEA before transfer.

# **TGSLC Voluntary Flexible Agreement** {#tgslc-voluntary-flexible-agreement .unnumbered}

The Texas Guaranteed Student Loan Corporation (TGSLC) VFA is designed to
test a variety of methods to significantly reduce student loan
delinquencies and defaults. By doing so, this VFA intends to ultimately
lower the costs of the FFEL program for ED and for taxpayers. The TGSLC
VFA is designed to allow the agency to use methods that educate students
to borrow responsibly and practice effective debt management.
Additionally, the guarantor has undertaken efforts to assist schools in
developing delinquency prevention activities and lowering their
institutional default rates, while also enhancing in-house delinquency
and default prevention activities at the agency. This emphasis allows
both ED and the guarantor to test whether the elements of the TGSLC VFA
are effective in reducing the operational costs that loan delinquencies
and defaults create for program participants in the FFEL program.

To reinforce the emphasis on preventing delinquencies and defaults, the
revenue TGSLC will earn under the VFA payment model is based on a
variable rate performance-based system weighted toward the results of
delinquency and default prevention activities. This changes the scope of
the payment model from one, which is heavily a post-default revenue
system that may serve as a disincentive to maximizing investment in
delinquency and default prevention efforts. It also maintains cost
neutrality to ED over the life of the VFA, with the possibility of cost
savings over the "life of the loan".

The TGSLC VFA is designed to develop program improvements that can be
implemented by business partners and customers of the guarantor as well
as other guarantors.

## Current Activities {#current-activities-3 .unnumbered}

TGSLC designed its VFA to test changes to the FFEL program under the
following guidelines:

-   providing strengthened financial incentives for the guaranty agency
    to prevent delinquencies and defaults;

-   scalability and transferability to other guaranty agencies;

-   quantifiable and measurable performance objectives;

-   simplicity of implementation, requiring no new processes for
    borrowers, schools, or lenders and servicers; and

-   minimal impact to ED's systems and processes.

    To accomplish these goals, the TGSLC VFA preserves the existing
    guaranty agency model as its framework, thus maintaining the basic
    processes used by schools, lenders, servicers, and ED. Within that
    framework, however, the agreement contains strong incentives for
    specific guaranty agency activities based on exceptional performance
    by TGSLC. The fees paid to the guarantor will be paid on a variable
    performance-based fee schedule. The goal is that the VFA will
    provide financial and operational benefits to both the guaranty
    agency and ED with improved performance.

    Under the VFA, TGSLC takes a performance-based approach that
    benchmarks against its own performance, and will receive the
    following fees:

-   Loan Processing and Issuance Fee (LPIF): This is a standard flat fee
    provided under the HEA and calculated on new loan guarantee volume
    disbursed.

-   Account Maintenance Fee (AMF): This is also a standard flat fee
    provided under the HEA and based on the original principal balance
    of outstanding loans.

-   Delinquency Prevention Fee (DPF): A new variable fee rate, paid by
    ED, based on TGSLC's success in reducing Default Aversion Assistance
    Requests (DAAR) as a percentage of loans in repayment; this
    strengthens incentives for the guaranty agency to work with lenders
    and loan servicers to prevent loans from becoming delinquent.

-   Default Aversion Fee (DAF): A variable rate, performance-based fee
    determined by the success of the guaranty agency in curing
    delinquencies so they do not go into default, with a base rate
    slightly higher than the rate under the traditional finance model;
    the variable nature of the rate is a positive incentive for the
    guarantor to focus on averting defaults (TGSLC is required to refund
    the DAF for those loans that later default).

-   Default Recoveries: TGSLC will be paid for default recoveries using
    a performance-based variable fee schedule for default recovery
    retention in which the rate of the fee increases as the recovery
    rate improves. The base rate is significantly lower than the rate
    under the traditional finance model.

+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Performance    | **Regular GA**        | **Texas VFA**         |   |
|   | Stage**          |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Origination**  | **Guarantee Fee Loan  | **Loan Processing and |   |
|   |                  | Processing and        | Issuance Fee (LPIF)** |   |
|   |                  | Issuance Fee (LPIF)** |                       |   |
|   |                  |                       | -   Monthly           |   |
|   |                  | -   0.65% of          |                       |   |
|   |                  |     Disbursement      | -   0.65% of          |   |
|   |                  |                       |     Disbursement      |   |
|   |                  | -   0.40% FY2003      |                       |   |
|   |                  |                       | -   0.40% FY2003      |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **In-Sc          | **Account Maintenance | **Account Maintenance |   |
|   | hool/Repayment** | Fee (AMF)**           | Fee (AMF)**           |   |
|   |                  |                       |                       |   |
|   |                  | -   0.10% of          | -   Monthly           |   |
|   |                  |     Outstanding       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   0.10% of          |   |
|   |                  |                       |     Outstanding       |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Loans in Good  |                       | **Delinquency         |   |
|   | Standing**       |                       | Prevention Fee        |   |
|   |                  |                       | (DPF)**               |   |
|   |                  |                       |                       |   |
|   |                  |                       | -   Monthly           |   |
|   |                  |                       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   0.05% to 0.12% of |   |
|   |                  |                       |     loans in          |   |
|   |                  |                       |     repayment         |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Delinquency**  | **Flat Default        | **Variable Default    |   |
|   |                  | Aversion Fee (DAF)**  | Aversion Fee (DAF)**  |   |
|   |                  |                       |                       |   |
|   |                  | -   No rebills        | -   Monthly           |   |
|   |                  |                       |                       |   |
|   |                  | ```{=html}            | ```{=html}            |   |
|   |                  | <!-- -->              | <!-- -->              |   |
|   |                  | ```                   | ```                   |   |
|   |                  | -   Refund defaults   | -   1.25% to 4% of    |   |
|   |                  |                       |     Default Aversion  |   |
|   |                  |                       |     Assistance        |   |
|   |                  |                       |     Request (DAAR)    |   |
|   |                  |                       |                       |   |
|   |                  |                       | -   12-month rebill   |   |
|   |                  |                       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   Refund defaults   |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Default**      | **95% Reinsurance**   | **100% Payment of     |   |
|   |                  |                       | Claims**              |   |
|   |                  | -   Loan Loss         |                       |   |
|   |                  |                       | -   Weekly Claims     |   |
|   |                  | -   Reserve in        |     Advanced by ED    |   |
|   |                  |     Federal Fund      |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   Escrow of         |   |
|   |                  |                       |     Reserves          |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+
|   | **Collections**  | **Flat Retention**    | **Variable            |   |
|   |                  |                       | Retention**           |   |
|   |                  | -   24% of Straight   |                       |   |
|   |                  |     Collections       | -   Annual            |   |
|   |                  |                       |                       |   |
|   |                  | -   18.5% of          | ```{=html}            |   |
|   |                  |     rehabilitated and | <!-- -->              |   |
|   |                  |     consolidated      | ```                   |   |
|   |                  |     loans             | -   19.5% to 23% of   |   |
|   |                  |                       |     Straight          |   |
|   |                  |                       |     Collections       |   |
|   |                  |                       |                       |   |
|   |                  |                       | ```{=html}            |   |
|   |                  |                       | <!-- -->              |   |
|   |                  |                       | ```                   |   |
|   |                  |                       | -   18.5% to 20% of   |   |
|   |                  |                       |     rehabilitated and |   |
|   |                  |                       |     consolidated      |   |
|   |                  |                       |     loans             |   |
+---+------------------+-----------------------+-----------------------+---+
|   |                  |                       |                       |   |
+---+------------------+-----------------------+-----------------------+---+

The terms of the agreement with TGSLC include the deposit of the
agency's Federal Fund into a limited access escrow account. TGSLC and ED
have established a process by which the guarantor estimates and requests
a weekly amount of funds needed from ED to pay claims in that week.

Under the traditional FFEL program financial structure, the guaranty
agency's strongest financial incentives are for collecting on loans that
have already defaulted. The TGSLC VFA shifts the focus of the incentives
to averting student loan delinquencies and defaults. Under the VFA,
TGSLC has a financial incentive to invest more in activities that help
to assist students to remain current on their loans and informed of the
loan process. This focus on helping borrowers avoid default and its
negative consequences is critical. By helping borrowers avoid default,
lenders and servicers reduce their administrative expenses related to
claim filing and their risk on default claims. The guaranty agency also
reduces its expenses for claim review while paying fewer lender default
claims and reducing collection costs. Additionally, Federal costs
decrease due to reduced reinsurance to TGSLC. Finally, the experience of
the borrower is enhanced as students avoid the problems of default and
gain money management skills.

Pre-delinquency activities increase the likelihood that borrowers will
successfully enter repayment and continue to repay their student loans.
An effective time to intervene is during the grace period, the six
months after a student graduates, withdraws, or drops below half-time
attendance. The objective of TGSLC pre-delinquency activities is to
inform student borrowers about the repayment process and their repayment
options prior to entering into repayment.

In the new TGSLC pre-delinquency program, the guarantor will work with
traditionally high and medium cohort default rate schools, as well as
schools with high drop-out rates, to identify and contact borrowers that
may be at a higher risk for default. Typical examples of such students
are those who withdraw or stop attending in mid-term. The agency can
identify at-risk students through its Loan Guarantee Processing System,
which tracks student enrollment and loan status. TGSLC will also contact
high-risk students individually by telephone to perform "grace
counseling." The focus of grace counseling varies by type of student.
TGSLC will also send informational items that reinforce the grace
counseling, such as money management information, a student loan account
summary, and brochures explaining repayment options.

The TGSLC VFA permits the agency to establish a shorter filing window
for lenders to submit a DAAR. Lenders are expected to file DAARs between
the 60^th^ and 70^th^ day of the borrower's delinquency. Receiving DAARs
as close to the 60^th^ day as possible provides TGSLC the best
opportunity to resolve delinquencies, and it is the experience of the
guarantor that early intervention is a key factor in preventing default
and its associated consequences. Also, the uniform filing date permits
TGSLC to provide information to schools on a timely basis and facilitate
their activities with students to prevent defaults.

The TGSLC default prevention process allows default prevention
counselors to track and therefore aid certain categories of at-risk
borrowers during the various stages of delinquency. The agency has
broadened and strengthened its borrower awareness programs during the
early months of the implementation of their VFA. The experience of the
guarantor demonstrates that through early knowledge of the value of
higher education, financial aid, and sound financial management
principles, students can become more capable of achieving their
educational goals and managing their finances responsibly. TGSLC
actively provides awareness information for pre-college students,
college students, and others.

TGSLC is committed to working with its business partners to avert
student loan defaults. The guarantor continues to develop new programs,
services and partnerships and continues to fortify those already in
existence. The VFA reaffirms the commitment of the agency to default
aversion through various initiatives.

-   **The Council for the Management of Educational Finance -** The
    council is comprised of a group of schools, lenders, and secondary
    markets sponsored by TGSLC, and provides a forum to organize
    cumulative industry knowledge into initiatives to lower cohort
    default rates at schools.

-   **The TGSLC program *Achieving Systemic Default Aversion* (ASDA)** -
    The ASDA provides institutions of higher learning with direct
    technical assistance and support services, such as developing
    campus-wide default management teams and default prevention plans.
    The program encourages use of *Default Prevention: A Model for
    Institutions of Higher Learning*, a publication created by TGSLC and
    based on work done at the University of Texas -- Pan American.

-   **National Summit of Councils** - In May 2001 TGSLC sponsored a
    National Summit of Councils on default prevention that brought
    together more than 80 professionals in the financial aid industry
    from across the country. Attendees discussed ways to strengthen
    collective efforts in federal student loan default aversion and debt
    management.

    The TGSLC VFA specifically incorporates performance-based
    measurement of certain quantifiable factors. First of these is the
    delinquency prevention rate. This measure is integrated into the
    TGSLC VFA reporting process and reflects the basis for calculation
    as detailed in the agreement. It is intended to measure the
    guarantor's effectiveness in preventing student loans from becoming
    delinquent, and is used to determine the variable rate,
    performance-based fee for the Delinquency Prevention Fee. It is
    calculated as follows:

    *Delinquency Prevention Rate = dollar amount of annualized
    cumulative DAARs / dollar amount of loans in repayment at beginning
    of federal fiscal year*

    Another measure used in the VFA is the delinquency cure rate
    achieved by TGSLC. The formula for calculating this measure is
    detailed in the agreement. It measures the guarantor's effectiveness
    in averting default of delinquent student loans, and is used to
    determine the performance-based variable fee rate for the Default
    Aversion Fee. It is calculated as follows:

    Delinquency Cure Rate = dollar amount of DAARs with no default claim
    filed before a given month\'s claim filing deadline (plus any claim
    recalls) / the original total dollar amount of DAARs for the
    respective month

    A third performance measure for TGSLC is its default recovery rate.
    The formula for calculating this measure is detailed in the
    Agreement. It measures the effectiveness of the guarantor in
    collecting on its defaulted loan portfolio, and is used to determine
    the performance-based variable fee rate for the Collections Fee. It
    is calculated as follows:

    Default Recovery Rate = annualized monthly collections / dollar
    amount of default portfolio at beginning of federal fiscal year

    A fourth measure is the claims reimbursement cycle. This measure
    indicates the efficiency with which ED funds claims payments to
    TGSLC. It is calculated as follows:

    Claims Reimbursement Cycle Time = number of business days elapsed
    between date of payment receipt and date of payment request

    A final index is the monthly settlement cycle. This measure
    indicates the efficiency with which ED and TGSLC settle net payment
    balances after monthly reporting, and is calculated as follows:

    *Monthly Settlement Cycle Time = number of days elapsed between date
    of cash settlement and date of report filing*

    Performance against these measures will be tracked and reported on a
    periodic basis by the guarantor to assist in future assessments of
    the VFA.

## Early Results

ED approved the TGSLC VFA in March 2001. With less than a year of
operation under the VFA, it is not possible to evaluate and provide a
full assessment of the data collected or practices observed. Moreover,
the effectiveness of the TGSLC VFA will not be immediately apparent in
the program statistics since the VFA relies on a long term "life of the
loan" perspective. TGSLC efforts encompass the entire spectrum of loan
activity, from the pre-loan awareness phase as early as elementary
school or junior high school through the post-collegiate loan repayment
phase. The direct effects of awareness efforts in the form of debt
management education, loan counseling and direct borrower contact during
the grace period of the loan may be difficult to quantify.

TGSLC will continue to implement, test and analyze the delinquency and
default prevention initiatives established under the VFA. Performance
regarding the primary source of revenue for the guarantor under the
agreement, the default aversion fee (DAF), is measured at the claim
filing deadline ten months after receipt of a Default Aversion
Assistance Request (DAAR). Therefore, the guaranty agency does not yet
have enough data to measure performance for DAF on DAARs filed in the
first months that the VFA became effective.

##  {#section-8 .unnumbered}

## Cost Projections of VFA {#cost-projections-of-vfa-3 .unnumbered}

Under the TGSLC VFA, the delinquency prevention fee and the default
aversion fee vary based on agency performance, ranging from .05 percent
to .12 percent and 1.25% to 4%, respectively. Cumulative default
aversion fee payments were estimated to increase by \$6 million over FY
2001-03, and the new delinquency prevention fee would increase Federal
costs by \$6 million over FY 2001-03, cumulatively.

The VFA also provides for a new collection retention structure with
retention on standard default collections varying from 19.5 percent to
23 percent depending on performance, and retention on collections
through loan consolidation or rehabilitation varying from 18.5 percent
to 20 percent. ED estimated cumulative savings of \$11 million over FY
2001-03 from this provision.

While the net result of these changes actually showed a slight increase
in federal costs, the proposal was deemed to be cost neutral due to the
fact that the increase was very small and well within the margin of
error for estimating total federal costs. Neither the escrow of the
Federal Fund, nor the long-term savings to ED that result from improved
performance in default prevention and default collections, were
considered by ED in determining cost neutrality.

+---------------------------------------+----+----+----+--------------+
| ##### Federal Cost Summary (amoun     |    |    |    |              |
| ts in millions) -- TGSLC VFA Proposal |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| Fiscal Year                           |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
|                                       | [2 | [2 | [2 | [FY          |
|                                       | 00 | 00 | 00 | 2001-2003]   |
|                                       | 1] | 2] | 3] | {.underline} |
|                                       | {. | {. | {. |              |
|                                       | un | un | un |              |
|                                       | de | de | de |              |
|                                       | rl | rl | rl |              |
|                                       | in | in | in |              |
|                                       | e} | e} | e} |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Current Services**                  |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Federal Costs**                     |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| GA Retention                          | 36 | 39 | 42 | 117          |
+---------------------------------------+----+----+----+--------------+
| Default Aversion Fee                  | 9  | 9  | 9  | 27           |
+---------------------------------------+----+----+----+--------------+
| Portfolio Maintenance Fee             | 11 | 12 | 12 | 35           |
+---------------------------------------+----+----+----+--------------+
| Loan Processing and Issuance Fee      | 11 | 12 | 13 | 36           |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Federal Revenues**                  |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| Gross Collections                     | 2  | 2  | 2  | 696          |
|                                       | 15 | 32 | 49 |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Net Federal Cost**                  | -1 | -1 | -1 | -481         |
|                                       | 48 | 60 | 73 |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **VFA Model**                         |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Federal Costs**                     |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| GA Retention                          | 33 | 35 | 38 | 106          |
+---------------------------------------+----+----+----+--------------+
| Default Aversion Fee                  | 11 | 11 | 11 | 33           |
+---------------------------------------+----+----+----+--------------+
| Portfolio Maintenance Fee             | 11 | 12 | 12 | 35           |
+---------------------------------------+----+----+----+--------------+
| Delinquency Prevention Fee            | 2  | 2  | 2  | 6            |
+---------------------------------------+----+----+----+--------------+
| Loan Processing and Issuance Fee      | 11 | 12 | 13 | 36           |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Federal Revenues**                  |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| Gross Collections                     | 2  | 2  | 2  | 696          |
|                                       | 15 | 32 | 49 |              |
+---------------------------------------+----+----+----+--------------+
|                                       |    |    |    |              |
+---------------------------------------+----+----+----+--------------+
| **Net Federal Cost**                  | -1 | -1 | -1 | -480         |
|                                       | 47 | 60 | 73 |              |
+---------------------------------------+----+----+----+--------------+
| Change from Current Services          | 1  | 0  | 0  | 1            |
+---------------------------------------+----+----+----+--------------+

## Term of VFA {#term-of-vfa-3 .unnumbered}

The TGSLC VFA is automatically renewed for successive one-year periods
at the end of each fiscal year unless or until written notice is
provided by either ED or TGSLC. Either party may terminate the VFA upon
written notice of no less than 90 days. If the VFA is terminated, ED
would reinstate the prior, standard guaranty agency agreement and TGSLC
would be required to comply with the reserve requirements under sections
422, 422A and 428 of the HEA, and any additional requirements required
by the Secretary to ensure the efficient transfer of responsibilities
back to the standard model. TGSLC would remain a FFEL guaranty agency
and payments would revert back to those provided in the standard
financing model.

Part of the negotiated structure of the TGSLC agreement was the return
of the Federal reserves to ED. In order to insure these monies would be
available to replenish the agency fund in the event the guarantor
returned to the standard guaranty agency agreement, an escrow account
was created. The full amount of this account will revert to TGSLC on the
effective date of termination; however ED will debit the fund of any
outstanding funds owed to either ED or the United States under the terms
of the HEA before transfer.

# **IV. Evaluating Impacts of VFA** {#iv.-evaluating-impacts-of-vfa .unnumbered}

The GLHEGC VFA was signed in November 2000; Secretary Rod Paige signed
the remaining agreements with ASA, CSAC and TGSLC in March 2001.
Accordingly, one agreement has been in place for a little over one year,
while three have been in place for only eight months. As illustrated
above, some notable early lessons have been seen in the implementation
of the various agreements, and guarantors are beginning the long process
of benchmarking the results of VFA initiatives. This analysis may over
time lead to a realignment of resources toward successful VFA elements
and away from those proving less successful or more difficult to
implement. As a rule, however, agencies have had little time to digest
the changes VFAs incur across a range of business functions.

The transition to a VFA model is not a one-day, "turn-key" transition.
There has been a significant development period both within the agencies
and within ED as the terms of the agreements are implemented.
Participating agencies and ED are still in this implementation phase,
setting up new processes and structures to administer the individual
VFAs.

The limited timeframe for the gathering of VFA information means that ED
cannot draw any meaningful conclusions. The challenge is developing,
benchmarking and standardizing reporting processes that enable a
consistent analysis. An analysis of the fees, costs and efficiencies
achieved under the VFAs is premature without at least one full fiscal
year of data.

ED will, however, continue to review the participating agencies with
respect to such measures as:

-   default prevention;

-   delinquency rates;

-   collections; and

-   reporting accuracy.

    Additionally, in evaluating the VFAs, ED will also review each
    agency's loan volume and economic condition and the loan volume and
    economic condition of other agencies.

    Lastly, to ensure that the program is accurately and substantively
    reviewed and assessed as further data becomes available, ED is
    planning further reports on the progress of the VFA program at the
    end of each fiscal year.

# **V. Appendices** {#v.-appendices .unnumbered}

-   Section 428A of the 1998 Amendments to the HEA

-   Text of VFA agreements

[^1]: Any waiver of the inducement rules granted to a guaranty agency
    under a VFA must also be granted to any other guaranty agency also
    doing business within the affected state or states. Further, that
    waiver must have the same terms and conditions that govern the
    waiver awarded to the guaranty agency entering into the VFA.

[^2]: These cost projections were prepared by modeling guaranty agency
    and Federal cash flows under both current agreements and the
    specific provisions of each proposed agreement. Forecast items
    include loan volume, outstanding balances, default reinsurance
    payments, insurance payments, and collections. For most of these
    line items, beginning balances reflect FY 1999 agency submissions
    via Form 1130, the most recent figures available at the time VFAs
    were negotiated. Balances for subsequent years reflect statutory
    provisions such as Federal Fund recalls and fee formulae, as well as
    forecasts from ED's budget projection model. All estimates reflect
    point-in-time projections based on these specific assumptions.
    Different assumptions could substantially increase or decrease
    individual estimates.