**Report To Congress:**

**Impact of Voluntary Flexible**

**Agreements in the Federal Family**

**Education Loan Program**

![](media/image1.png){width="2.3125in" height="2.28125in"}

# U.S. Department of Education

**Federal Student Assistance**

**Financial Partners**

June 23, 2003

Voluntary Flexible Agreement Report

I.  **Introduction**

In January 2002, the Department of Education (ED) provided an Interim
Report to Congress titled " Impact of Voluntary Flexible Agreements in
the Federal Family Education Loan Program". In that report, ED reviewed
the selection and status of the Voluntary Flexible Agreements (VFAs).
Specifically, ED provided a brief overview of the terms of the VFA
authority; the process ED followed in entering into the agreements; the
specific terms and conditions of each of the four individual agreements;
and a summary of the performance measures that ED intended to use to
analyze the impact of VFAs on the FFEL program.

The interim report did not offer any conclusions about the effectiveness
of the VFA program because the agreements were in place for less than
one year when the report was drafted. During that time, there was a
significant development period both within the agencies and within ED as
the terms of the agreements were implemented. Further, ED was faced with
the challenge of developing, benchmarking and standardizing reporting
processes to enable a consistent analysis. ED also wanted to have at
least one full year of data in order to accurately reflect on the impact
of the agreements. Indeed, in some cases, it takes at least one year
before results can be measured. For example, a default is defined as 270
days in delinquency. If work is performed at 60 days delinquent or
earlier, sufficient time must elapse to verify the success in preventing
default.

*Purpose of This Report*

Although there were some notable early lessons that were shared about
the VFA program in the interim report, ED promised a follow-up report to
discuss the progress of the VFA program. This report provides the
following:

-   A summary of the evolution of the VFA agreements.

-   Results of the analysis of VFA performance through FY2002 including
    a summary of the performance indicator results for the VFAs as
    compared to the 32 non-VFA guaranty agencies (GAs). This section
    describes the observed results and the limitations ED discovered in
    using these metrics for evaluation of VFA performance.

-   A summary of feedback from servicers and other GAs regarding the
    impact of the VFA program on the Federal Family Education Loan
    Program (FFELP).

-   Conclusions and next steps for ED.

-   Detailed descriptions provided by each VFA Agency of its default and
    delinquency programs in place through FY2002 and FY2003 to date
    (Appendix).

# II. Evolution of the VFA

# *VFA Legislation*

In 1998, Congress amended the Higher Education Act of 1965 (HEA) to
authorize the Secretary of Education to enter into VFAs with GAs. These
VFAs would replace the standard guaranty agency agreements for those
agencies. The law allowed for no more than six VFAs during fiscal years
1999, 2000, and 2001. Beginning with fiscal year 2002, the law allows
any GA or consortium of agencies to enter into a VFA with the Secretary.
The Secretary entered into VFAs with four agencies during FY 2001 and
those agreements remain in place. Although several other guarantors have
made informal inquiries regarding the possibility of entering into a VFA
since the limitation expired, only one additional agency has submitted a
formal request for a VFA. This request is being evaluated for cost
neutrality to ED.

As ED explained in its initial report, the statute allows the Secretary
to waive or modify, through a VFA, any statutory and regulatory
requirement on the guaranty agency, 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 statutory prohibition on inducements by GAs 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 GA is the designated guarantor. Each of the VFAs
provides waivers of a variety of statutory and regulatory provisions;
however, none of these waivers relate to inducements.

# *Changes Under the VFA Program*

The VFAs incorporate and modify the existing FFELP agreements between ED
and the participating GAs in order to test new and innovative methods
for carrying out the types of activities currently required of GAs. The
intent is to find a more efficient and effective means of managing the
FFELP through examining alternatives to the current GA model and its fee
and revenue structure.

Four GAs entered into VFAs with the Department: American Student
Assistance (ASA), California Student Aid Commission (CSAC), Great Lakes
Higher Education Guaranty Corporation (Great Lakes) and TG Student Loan
Corporation (TG). The activities implemented by the GAs under the VFAs
have a common theme---to improve the efficiency of collections and to
shift incentives from back-end collection on defaulted loans to
avoidance of defaults in the first place. Specifically,

1.  ASA is testing portfolio "wellness", the concept that the borrower
    is a customer and that an improved relationship between the borrower
    and the GA 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. Services such as
    outreach to borrowers have been enhanced to promote educational
    opportunity and responsible borrowing. CSAC is also revamping its
    claims and collections process to be more efficient and effective.

3.  Great Lakes has replaced all federal revenue streams with a single
    performance-based fee indexed to its ability to "cure", or repair,
    delinquencies to provide a financial incentive to concentrate on
    default avoidance.

4.  TG 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.

The VFA with Great Lakes was signed in November 2000 and later amended
in July 2002. The other VFAs were signed in March 2001.

**III. Performance Indicators and Results**

Section 428A of the HEA provides that ED include in its report to
Congress on VFAs "a description of the standards by which each agency's
performance under the agency's voluntary flexible agreement was assessed
and the degree to which each agency achieved the performance standards."

In consultation with the GA community, ED established common, general
indicators to evaluate the performance of each VFA and, whenever
possible, to compare VFA GA performance with non-VFA GA performance. The
measures include:

-   Analyzing the **dollar ratio of lender held loans** to the total GA
    loan portfolio. This measure indicates the GA's success at ensuring
    that fewer loans are entering default.

-   Utilizing the reinsurance **trigger rate** to monitor the GA's
    success at default aversion. The trigger rate represents the total
    default reinsurance claims paid by ED to a GA as a percentage of the
    amount of loans in repayment at the end of the preceding fiscal
    year. (Section 428(c)(1)(B) of the HEA.)

-   Determining GA effectiveness in **collection recoveries** in order
    to monitor the GA's ability to recover funds from its defaulted loan
    portfolio.

Supplemental indicators include:

-   Assessing the ability of the GAs and ED to effectively administer
    the program without guaranty agency reserves (**escrow account**).

-   Monitoring the percentage of National Student Loan Data System
    (NSLDS) records entered correctly by the VFAs as a percentage of the
    total number of possible entry records (**data pass rate**) in order
    to measure data integrity.

-   Monitoring the VFA GA\'s **market share** in comparison to the other
    32 GAs.

In order to provide a basis for evaluating the performance of GAs with a
VFA, the performance indicators are benchmarked against individual
historical performance, the other VFA GAs, and the non-VFA GAs to assess
whether performance has improved, deteriorated or remained the same. For
example, the dollar ratio of loans being held at a lender or servicer
for collections as of a certain date provides little meaningful data if
not compared to the performance in the categories mentioned above.

ED acknowledges that the use of these high level performance indicators
without the underlying analysis of trends unique to the individual VFA
and non-VFA GAs does not provide definitive data regarding the true
success or failure of this initiative. ED is performing this more
comprehensive analysis and provides the following as an initial
indicator of potential results.

*Dollar Ratio of Lender Held Loans*

The dollar ratio of lender held loans provides a mechanism to examine
whether a GA is successful at avoiding defaults. The more loans retained
by the lender means fewer loans turned over to the GA in default. In
order to analyze the success of the VFAs in preventing default, it is
important not only to look at the percentages before commencement of the
VFA program (FY 2000) compared to after (FY 2001 and FY 2002), but also
to examine the trends throughout the FFEL program.

Based on data from the NSLDS benchmark reports for FY 2000, FY 2001, and
FY 2002, there has been an industry trend of increased lender held loans
among the non-VFA GAs. This may suggest an overall industry trend in
successful default prevention. Among the VFA's, CSAC has demonstrated
the most dramatic change in the percentage of lender held loans. ED is
undertaking additional research into the reasons for this change. Great
Lakes, on the other hand, has consistently maintained a ratio that far
exceeds the industry average, suggesting that this measure may not be a
good indicator of that agency's performance as a VFA. In general, this
performance indicator does not account for independent lender or
servicer activity that may be contributing to overall default aversion
and those factors also need identification, as well as the contributions
associated with lender/servicer/VFA partnerships.

+------------+-------------+-------------+--------------+------------+
| Agency     | Dollar      | Dollar      | Dollar Ratio | Difference |
|            | Ratio of    | Ratio of    | of Lender    |            |
|            | Lender Held | Lender Held | Held Loans   | (FY        |
|            | Loans (FY   | Loans (FY   | (FY          | 2000-FY    |
|            | 2000)       | 2001)       | 2002)[^1]    | 2002)      |
+------------+-------------+-------------+--------------+------------+
| CSAC       | 85.57%      | 88.03%      | 89.98%       | 4.41%      |
+------------+-------------+-------------+--------------+------------+
| ASA        | 89.74%      | 89.92%      | 92.06%       | 2.32%      |
+------------+-------------+-------------+--------------+------------+
| TG         | 91.76%      | 91.83%      | 91.78%       | .02%       |
+------------+-------------+-------------+--------------+------------+
| Great      | 95.17%      | 95.29%      | 96.23%       | 1.06%      |
| Lakes      |             |             |              |            |
+------------+-------------+-------------+--------------+------------+
| Non-VFA    | 90.61%      | 91.53%      | 92.26%       | 1.65%      |
| Average    |             |             |              |            |
+------------+-------------+-------------+--------------+------------+

### Trigger Rate

### 

Pursuant to Section 428(c) of the HEA and 34 C.F.R. § 682.404, the
Secretary pays reinsurance to GAs depending on their "trigger rate". ED
generally reimburses the GA for 95% of its losses on default claim
payments to lenders. If, however, the total reinsurance claims paid by
ED reaches five percent of the amount of loans in repayment at the end
of the preceding fiscal year, the reinsurance payment on default claims
subsequently paid by the GA is reduced. This is the reinsurance trigger
rate.

In addition to using this rate to determine if a GA is to receive a
reduction in its reinsurance rate, it was assumed in the initial
analysis of the VFA performance indicators that the reinsurance trigger
rate could also be used for monitoring default aversion success. The
assumption is that a lower reinsurance trigger rate indicates greater
success in default aversion. Since this figure is influenced by the
composition of a GA's portfolio, yearly fluctuations in that
composition, and the number of loans guaranteed by the GA that are
consolidated ED is performing additional analysis of this measure as a
true performance indicator.

The following chart illustrates the trigger rates for FY 2000, FY 2001,
and FY 2002.

+----------------------+--------------+--------------+-----------------+
| Agency               | Trigger Rate | Trigger Rate | Trigger         |
|                      |              |              | Rate[^2]        |
|                      | (FY 2000)    | (FY 2001)    |                 |
|                      |              |              | (FY 2002)       |
+----------------------+--------------+--------------+-----------------+
| CSAC                 | 2.59%        | 2.61%        | 2.52%           |
+----------------------+--------------+--------------+-----------------+
| ASA                  | .99%         | 1.32%        | 1.24%           |
+----------------------+--------------+--------------+-----------------+
| TG                   | 2.0%         | 2.77%        | 3.25%           |
+----------------------+--------------+--------------+-----------------+
| Great Lakes          | 1.17%        | 1.46%        | 1.06%           |
+----------------------+--------------+--------------+-----------------+
| Non VFA Average      | 1.73%        | 2.15%        | 1.76%           |
+----------------------+--------------+--------------+-----------------+

Trigger rates increased for all entities in FY 2001 indicating common
factors impacting the entire industry. With the exception of TG, trigger
rates decreased across the board between FY 2001 and FY 2002. This trend
may be an indicator of VFA and industry wide successes, but it requires
a more detailed regional and portfolio trend analysis to verify the high
level results.

*Collection Recovery Rate*

The Collection Recovery Rate is the total dollar amount of principal and
accrued interest collected by a GA on defaulted loans during the current
and prior

quarters of the fiscal year represented as a percentage of the total
dollar amount of principal and interest in default as of the beginning
of the fiscal year. This rate monitors a GA's ability to collect on the
default loans it holds. The collection recovery rate includes recoveries
made through straight collections as well as through consolidation. The
extensive use of consolidation as a collection recovery vehicle can
increase the collection recovery rate. ED is in the process of
re-evaluating this performance measure and reviewing data that reflects
recoveries based on all recovery types for both the VFA GAs and the
non-VFA GAs. Loan consolidations will be removed from the equation in
the follow-up analysis and the performance indicator will be
recalculated.

The following chart provides year-end collection recovery rate
percentages for FY 2000, FY 2001, and FY 2002.[^3]

  -------------------- ---------------- ---------------- ----------------
  Agency               Collection       Collection       Collection
                       Recovery Rate FY Recovery Rate FY Recovery Rate FY
                       2000             2001             2002[^4]

  CSAC                 19.16%           23.18%           26.93%

  ASA                  20.25%           18.29%           16.46%[^5]

  TG                   27.08%           26.17%           29.49%

  Great Lakes          22.85%           26.53%           24.31%

  Non-VFA Average      20.66%           26.07%           26.13%
  -------------------- ---------------- ---------------- ----------------

The GA industry's collection recovery rates increased dramatically in FY
2001 and remained constant through FY 2002. This may be attributed to
the rise in consolidation volume and its impact on collection recovery
rates. Among the GAs with VFAs, CSAC and TG have experienced increases
in their recovery rates due in part to their consolidation volume. The
downward trends in ASA and Great Lakes may be attributed to the large
percentage of rehabilitation loans in their portfolios or greater
collection challenges.

*Market Share*

In the initial report, ED promised to evaluate each agency's loan volume
and economic condition and the loan volume and economic condition of
other guaranty agencies. This was in response to some concern from the
FFELP community that there could be unintended consequences for their
businesses as a result of the implementation of the VFA agreements. In
order to determine whether the VFAs have had a competitive advantage, ED
evaluated the VFA market share in relation to the non-VFA GAs.

Specifically, market share is measured by "Net Guarantees." This measure
represents the amount of new net guarantees in the fiscal year as a
percentage of the total net guarantee portfolio.

ED also consulted with GAs, servicers and lenders to determine if the
agreements have had an adverse impact on other financial partners.

Based on ED's analysis of new guarantees, it appears that market share
for the VFA GAs has increased slightly for two of the agencies (CSAC,
ASA) and decreased slightly for the other two agencies (TG, Great
Lakes). For non-VFA guarantors, market share has decreased by a marginal
amount each year. Since these figures represent "snap shot" data as of
the end of each fiscal year, ED is performing additional analysis of
these results to determine if this data represents a consistent trend or
if the data represents point in time fluctuations in overall market
share. ED is also assessing regional market trends to determine regional
shifts in new volume and to assess where the change in non-VFA market
share is being driven.

+----------------+------------+-----------+-----------+--------------+
| Agency         | Market     | Market    | Market    | Difference   |
|                | Share FY   | Share FY  | Share FY  |              |
|                | 2000       | 2001      | 2002      | (FY 2000 -   |
|                |            |           |           | FY2002)      |
+----------------+------------+-----------+-----------+--------------+
| CSAC           | 8.13%      | 8.37%     | 8.75%     | \+ .62%      |
+----------------+------------+-----------+-----------+--------------+
| ASA            | 3.93%      | 3.84%     | 4.73%     | \+ .80%      |
+----------------+------------+-----------+-----------+--------------+
| TG             | 6.47%      | 6.51%     | 6.29%     | \- .18%      |
+----------------+------------+-----------+-----------+--------------+
| Great Lakes    | 7.90%      | 7.61%     | 7.55%     | \- .35%      |
+----------------+------------+-----------+-----------+--------------+
| Non-VFA Market | 73.57%     | 73.67%    | 72.68%    | \- .89%      |
| Share          |            |           |           |              |
+----------------+------------+-----------+-----------+--------------+

Community reaction to the VFAs is discussed in Section IV, below.

*Data Integrity*

> Although only the ASA VFA includes improved Data Integrity as a
> specific goal of the VFA, ED thought it would be beneficial to include
> a measure to validate the accuracy of the data being provided to the
> Department for use in calculating the other performance measures.
> Specifically, NSLDS data is used to calculate the Dollar Ratio of
> Lender Held Loans measure as well as the market share measure.
> Therefore, in order to verify that the VFA GAs are accurately
> reporting NSLDS data, ED Program Review Specialists conducted
> interviews with ED NSLDS personnel and with GA NSLDS Specialists. The
> reviewers also analyzed the monthly GA benchmark reports through
> December 2002. These monthly reports are compiled by the NSLDS staff
> to assess the accuracy of all GA submissions. The reviewers observed
> continuous improvement in the data pass rate as well as in the updated
> outstanding balances and status codes for lender held loans, which
> demonstrates that the GAs are updating their systems with data being
> submitted by their lenders.
>
> To evaluate the accuracy of the status codes and balances, the review
> team performed the following:

1.  Selected a random sample of loan records from the GAs' NSLDS extract
    file using a statistically valid random sample having a proportional
    acceptable error of 0.05 and 95% confidence level.

2.  Each GA produced a report listing loan status, loan balances and
    effective dates for each loan record in the sample. The GA report
    listed the data as it appeared in the agency's system extract and as
    it was reported in the most recent lender manifest reports.

3.  The loan records were then compared with data currently residing on
    NSLDS.

4.  The team analyzed the report to determine the percent of matches
    between the three systems that impact data used for evaluating GA
    performance.

The following table shows the percentage of matches:

+-----------+------+------------+------------+----------+-------------+
| > GA      | > Sa | > \# of    | > \% of    | > \# of  | > \% of     |
|           | mple | > Records  | > Matches  | >        | > Matches   |
|           | >    | > on       | > Between  |  Records | > \*        |
|           | Size | > Agency   | > NSLDS    | > on     | > Between   |
|           |      | > Extract  | > Data and | > Agency | > Lender    |
|           |      | > Matching | > GA       | >        | > Manifest  |
|           |      | > NSLDS    | > System   |  Extract | > and GA    |
|           |      |            | > Data.    | >        | > Data      |
|           |      |            |            | Matching |             |
|           |      |            |            | > Lender |             |
|           |      |            |            | >        |             |
|           |      |            |            | Manifest |             |
+-----------+------+------------+------------+----------+-------------+
| > CSAC    | >    | > 384      | > 100%     | > 384    | > 100%      |
|           |  384 |            |            |          |             |
+-----------+------+------------+------------+----------+-------------+
| > ASA     | >    | > 380      | > 99%      | > 342    | > 90%       |
|           |  384 |            |            |          |             |
+-----------+------+------------+------------+----------+-------------+
| > TG      | >    | > 382      | > 99.4%    | > 383    | > 99.7%     |
|           |  384 |            |            |          |             |
+-----------+------+------------+------------+----------+-------------+
| > Great   | >    | > 382      | > 99.4%    | > 377    | > 98.2%     |
| > Lakes   |  384 |            |            |          |             |
+-----------+------+------------+------------+----------+-------------+

> \*Loans held by the GA and correctly omitted from the lender manifest
> are treated as matches. Non-matches include both missing data and
> differences in status codes.

According to the NSLDS Benchmark reports for FY 2000, FY 2001, and FY
2002, the Data Pass Rates are as follows:

+------------+------------+------------+------------+----------------+
| Agency     | Data Pass  | Data Pass  | Data Pass  | Difference     |
|            | Rate (FY   | Rate       | Rate       |                |
|            | 2000)      |            |            | (FY 2000 - FY  |
|            |            | (FY 2001)  | (FY 2002)  | 2002)          |
+------------+------------+------------+------------+----------------+
| CSAC       | 97.48%     | 97.79%     | 97.43%     | \- .05%[^6]    |
+------------+------------+------------+------------+----------------+
| ASA        | 95.94%     | 97.80%     | 98.56%     | \+ 2.62%       |
+------------+------------+------------+------------+----------------+
| TG         | 99.72%     | 97.49%     | 99.81%     | \+ .09%        |
+------------+------------+------------+------------+----------------+
| Great      | 97.72%     | 97.04%     | 99.38%     | \+ 1.66%       |
| Lakes      |            |            |            |                |
+------------+------------+------------+------------+----------------+
| Non-VFA    | 97.48%     | 97.47%     | 97.69%     | \+ .21%        |
| Average    |            |            |            |                |
+------------+------------+------------+------------+----------------+

Overall, NSLDS data integrity is increasing for both VFA and Non-VFA
GAs.

*Escrow Account*

Three of the four VFA agencies have an alternative claim payment-funding
model. Generally, a GA uses its Federal Fund to pay claims to lenders.
As part of these VFAs, the GA moved its Federal Fund to an escrow
account that could only be used in very limited circumstances. The VFAs
replaced access to the Federal Fund with a process by which the GA
notified ED of the amount of the pending claims for a set period of time
and ED provided funds to the GA to pay these claims. To evaluate this
system, ED collected data and interviewed the GAs regarding the use of
the Federal Fund in escrow and the timing of ED funding for claim
payments. ED's analysis indicates that this may be a viable alternative
method of paying claims, with the following exceptions:

-   All three VFA agencies have experienced late payment of funds by ED.
    Late funding by ED puts agencies in a position of not paying claims
    timely or paying with checks issued from accounts that have not been
    funded.

-   A review of the bank statements for the GA with an established
    Federal Fund escrow account showed no unauthorized withdrawals from
    the accounts. However, because of late funding by ED, some agencies
    chose to pay claims using other funds available to them. The VFA
    agreements prohibit withdrawing money from the Federal Fund escrow
    account for claim payments until 30 days after the agencies submit
    requests for the money.

Specifically, each of the three agencies using this model has
experienced late payment of their invoices by ED as follow:

+----------+-------------------------+--------------------------------+
| Agency   | Number of Claim         | Number of Instances Ed Funded  |
|          | Requests Reviewed       | Agency Later Than 7 Days.      |
+----------+-------------------------+--------------------------------+
| Great    | 61                      | 4                              |
| Lakes    |                         |                                |
+----------+-------------------------+--------------------------------+
| ASA      | # 52                    | 5                              |
+----------+-------------------------+--------------------------------+
| TG       | 57                      | 9                              |
+----------+-------------------------+--------------------------------+

Each of the GAs has an automated claim check processing system. Checks
are automatically issued and mailed to lenders on a specific day each
week. If ED is late in funding the claim payment bank accounts, the GAs
could be put in a position of potentially issuing checks on accounts
with insufficient balances.

Interviews with the agencies using this funding model show that they
embrace the concept and believe it to be valuable. In some instances
during the reporting period alternate funding was used, but the source
and availability of the alternate funding is not assured in the future.
As of March 2003, all agencies agree that ED has improved in its ability
to provide timely funding and that funding should not be an issue moving
forward.

### **IV. Community Reaction**

To solicit feedback on the VFA program from other GAs, lenders and
servicers, ED developed a questionnaire for lenders, servicers and GAs.

Questions to lenders and servicers included the following:

1.  How have you been impacted by the VFAs?

2.  What is your overall opinion of the VFA program?

3.  Have you worked with any VFA GAs? If so, what was the result?

4.  Have there been unintended consequences for your business process as
    a result of the implementation of the VFAs?

5.  Has your relationship with any of the VFA GAs changed since the
    program was started?

6.  Has your relationship with any non-VFA GA changed since the VFA
    program started?

7.  Have you found it different working with VFA GAs?

8.  Do you find the relationship with the VFA GAs easier or harder than
    before?

9.  Do you feel that VFA default aversion programs lessen the burden on
    you with respect to default aversion strategies?

10. If you work with ASA, Great Lakes, or TG, have you noticed
    differences since they escrowed their Federal Fund?

> In addition to the questions above, GAs were asked:

1.  Did you attempt to enter into a VFA with ED?

2.  If given the opportunity now, would you consider entering into a
    VFA?

3.  Do you feel VFA GAs are at an advantage or disadvantage compared to
    GAs working under the standard agreement?

4.  Do you feel that GAs with a VFA can operate fairly in the same
    market with GAs operating under the standard agreement?

5.  Do you feel that the terms and conditions in the VFAs are scalable
    and transferable to the wider FFEL community?

6.  Is there any part of the VFAs that you would like to see blended
    into your agreement with ED?

7.  Have you worked with any lenders or servicers to develop default
    aversion programs?

In response to this questionnaire, ED received the following feedback
from three servicers and five GAs. ED received no comments from FFELP
lenders:

*Servicers*

One servicer that responded to the questionnaire primarily discussed its
experience as a Certified Compliant servicer for Great Lakes. With this
designation, Great Lakes pays claims submitted by the lender without a
pre-payment detailed claim review. This impacts the number of loan
returns received by the organization. It also improves the turnaround
time for the servicer's receipt of claim payments. Further, the servicer
experienced more frequent communications with the guarantor since the
VFA was initiated. This servicer is extremely pleased with the VFA
program and expressed interest in expanding it.

The second servicer, who is working with a number of the VFA GAs, has
had differing experiences with the program. It appears that the servicer
had a number of disagreements with one of the guarantors concerning
non-regulatory requirements imposed by the guarantor. Although this
servicer supports the concept of experimentation and the development of
alternative financing models to encourage performance-based compensation
of GAs, it stated that it does not support programs "that appear to only
benefit the guarantor." This servicer also expressed concern that the
VFA program and the flexible nature of the agreements could be
counterproductive to standardization initiatives that the industry has
established over a period of time. The servicer is also concerned that
the monitoring and evaluation of the program was not established prior
to the implementation of the VFA program.

The second servicer also described positive experiences with the
partnering efforts of Great Lakes and ASA. In particular, the servicer
mentioned that its relationship with ASA was greatly enhanced. Under the
VFA program, the servicer felt that ASA recognized the servicer as a
true partner with a common goal. On the other hand, this servicer is
dissatisfied with TG's initiative relating to the filing of default
aversion assistance requests. The servicer explained that this
initiative has increased system costs and has exposed the organization
to risks that are not present with other GAs.

The third servicer that responded to the questionnaire has not seen any
direct positive enhancements to the FFELP as a result of the VFA
programs. This servicer has relationships with all four VFA GAs and has
seen no impact on origination or disbursement. Further, they have seen
no reductions in delinquency or default, or program simplification. This
servicer also complained about TG's modification to the default aversion
assistance request process. The servicer did not anticipate that the
agency would impose a change in the timeframe in which lenders were
permitted to file default aversion requests. The servicer also commented
on the claim filing procedures implemented by Great Lakes. Although
there was a perceived benefit relating to the procedures, it appears to
require additional documentation for one third of the accounts filed.
Because the change was fairly recent, however, the servicer stated that
it was difficult to determine any substantial benefits attributable to
the change.

*Guaranty Agencies*

In general, the non-VFA GAs that responded to the questionnaire are
supportive of the VFA program. The GAs that responded said that they are
always interested in developing new ways to improve the FFELP and are
enthusiastic about discovering innovative approaches to student aid
delivery. Additionally, there are elements of the VFAs, such as
realignment of incentives and treatment of the Federal Fund, which some
GAs believe would be worth considering in a wider context. The
overwhelming feeling among GAs, however, is that the "jury is still out"
on many, if not most, features of the existing VFAs.

Additionally, the GAs that responded to the survey do not believe that
VFAs are necessary to achieve positive results in default aversion and
collection efficiency. Rather, implementing "good, innovative business
practices was just part of what a GA was supposed to do." For example,
one GA that responded stated:

> "We do not consider VFAs to be the only way for us to be innovative.
> In fact, we believe current law and regulations give us flexibility to
> be creative and inventive. We have already used some of that
> flexibility to implement innovations like blanket certificates of
> guaranty."

Another GA added that it is not clear that the VFA program, facilitated
by the statutory and regulatory waivers, has created more efficient
approaches to managing the FFELP and reducing defaults beyond that which
would have been achieved by the participating guarantors in the absence
of a VFA.

Some GAs feel that there is little impact on the overall marketplace due
to VFAs. Competitive pressures are already strong in the student loan
industry and the VFAs have not significantly altered the landscape. One
GA, however, expressed a concern that VFAs might destabilize the
commonality and standardization that the student loan industry has been
trying to create. Consequently, there is the potential that the VFAs
will create confusion among servicers and lenders.

Additionally, some of the responding GAs believe that the VFAs that have
escrowed their Federal Fund are at an advantage because the balance of
the Federal Funds placed in escrow are preserved and they are not
subject to the minimum reserve ratio requirement for non-VFA guarantors.

Lastly, one GA felt that additional income generated by the GAs with
VFAs have provided a competitive advantage for them in new market areas.
This GA stated that the concept of the VFAs was to create an opportunity
to test and improve various ideas within the GA that could be
transported to other agencies. The GA said that this doesn\'t seem to be
the current focus of the VFAs

On the other hand, lenders have asked some GAs to replicate the
streamlined payment process that is being used by Great Lakes under its
VFA. Lenders found the process attractive because it makes claims review
and payment more efficient. Currently, other GAs cannot duplicate the
streamlined claims payment process without regulatory and statutory
waivers.

GAs also find that the delinquency prevention fee, incorporated into
TG's VFA, is attractive. They believe it makes sense from a federal
fiscal policy standpoint as well as GA funding standpoint to realign
incentives to achieve federal savings.

##### V. Conclusion

The VFA program has enabled the participating GAs to develop innovative
programs to prevent default, provide better communication with the
borrower, and increase collection efficiency. Additionally, the VFA GAs
are focusing most of their efforts on changing the culture of their
organizations and their partnerships with other FFELP participants in
order to achieve desired results.

With respect to the performance indicators, the results are inconclusive
and require a more detailed analysis. Generally, under the VFAs, the
financial incentives for the GAs have shifted from collections to the
avoidance of defaults in the first place. Additionally, the
participating agencies are more focused on rehabilitation of loans
rather than straight collections. Lastly, many of the efforts currently
underway at the GAs will see results down the line -- especially with
respect to the cost of default.

Although our review of market share for the VFAs illustrates that there
have been some small shifts in volume among the GAs, certain GAs feel
that the GAs with VFAs have a competitive advantage. The community
values the innovations that are occurring and sees promise in some of
the fee and systems changes that have occurred through the agreements,
but feels that VFAs are contrary to the standardization that FFELP
participants are striving to achieve.

In summary, there are valuable components of each VFA that warrant
additional study by ED to determine the cost effectiveness for ED and
their integration into the overall program. Some of the innovations do
not require changes in legislation or regulations -- they are programs
that can or have already been implemented by the GAs. Other changes,
especially those related to financial incentives, the streamlined claims
payment process, and the use of the Federal Fund would require
Congressional action. ED will continue to analyze and modify the VFA
program to enhance the effectiveness of the FFEL program and improve the
ability of the FFELP to provide financial assistance to our students.

**Appendix**

**Detailed Description of VFA GAs**

# Introduction

In the preparation of the appendix for this report, each of the VFA GAs
were asked to provide a description of the programs it had implemented
under its VFA agreement. Those descriptions are provided below. These
descriptions are provided for informational purpose only and do not
reflect any conclusions by ED on the value of the described activities.

**American Student Assistance (ASA)**

## ***Summary of Agreement***

The VFA with ASA is intended to test the concept of portfolio wellness,
based on the idea that the appropriate role of a guarantor is to assist
students in successfully completing a program of higher education
financing and repayment. The first component of portfolio wellness is to
effectively manage the guaranty portfolio of FFEL loans. The second
component of portfolio wellness is to acknowledge that the borrower is a
customer of the guarantor because, according to ASA, building a positive
interactive relationship with the borrower is the key to successful
portfolio management.

As stated in ASA's VFA proposal, a wellness relationship is built on
"trust and mutual respect. The key to such a relationship is multiple,
positive contacts and interactions with the borrower." In order to
achieve the customer centric goals, ASA focused on its organizational
culture and portfolio management practice. Recognizing the borrower as a
customer has been particularly important in how ASA conducts its post
loan origination activities. Additionally, through analysis of its loan
portfolio, ASA has been able to identify certain trends and behaviors of
borrowers. Based on studying those behaviors, ASA has defined which
programs are most likely to succeed before implementing them into the
daily operation.

Like many of the other VFAs, the ASA agreement shifts the primary
revenue source from collections on defaulted loans toward maintaining
borrowers in good standing. Under the terms of the ASA VFA, a portfolio
wellness fee replaces many of the standard guarantor revenue sources.
This fee is based on loans that are maintained in good standing and
improvement in the default rate of ASA-guaranteed loans. ASA uses this
wellness fee to fund the new programs it has introduced under the VFA
agreement.

The following chart illustrates ASA's current fee structure as compared
to the standard GA model:

+---------------+--------------------------+--------------------------+
| Performance   | Regular GA               | ASA VFA                  |
| Stage         |                          |                          |
+---------------+--------------------------+--------------------------+
| Origination   | Loan Processing and      | Loan Processing and      |
|               | Issuance Fee (LPIF)      | Issuance Fee (LPIF)      |
|               |                          |                          |
|               | -   0.65% of             | -   Monthly              |
|               |     disbursement         |                          |
|               |                          | ```{=html}               |
|               | -   0.40% FY 2003        | <!-- -->                 |
|               |                          | ```                      |
|               |                          | -   0.65% of             |
|               |                          |     disbursement         |
|               |                          |                          |
|               |                          | ```{=html}               |
|               |                          | <!-- -->                 |
|               |                          | ```                      |
|               |                          | -   0.40% FY 2003        |
+---------------+--------------------------+--------------------------+
| In-Sch        | Account Maintenance Fee  |                          |
| ool/Repayment | (AMF)                    |                          |
|               |                          |                          |
|               | -   0.10% of outstanding |                          |
|               |     loans                |                          |
+---------------+--------------------------+--------------------------+
| Loans in Good | N/A                      | #                        |
| Standing      |                          | # Portfolio Wellness Fee |
|               |                          |                          |
|               |                          | -   Baseline fee --      |
|               |                          |     Monthly              |
|               |                          |                          |
|               |                          | -   Variable fee --      |
|               |                          |     Annual               |
+---------------+--------------------------+--------------------------+
| Delinquency   | Flat Default Aversion    |                          |
|               | Fee (DAF)                |                          |
|               |                          |                          |
|               | -   No rebills           |                          |
|               |                          |                          |
|               | ```{=html}               |                          |
|               | <!-- -->                 |                          |
|               | ```                      |                          |
|               | -   Refund defaults      |                          |
+---------------+--------------------------+--------------------------+
| Default       | 95% Reinsurance          | 100% Payment of Claims   |
|               |                          |                          |
|               | -   Loan loss            | -   Weekly claims        |
|               |                          |     advanced by ED       |
|               | -   Reserve in Federal   |                          |
|               |     Fund                 | ```{=html}               |
|               |                          | <!-- -->                 |
|               |                          | ```                      |
|               |                          | -   Escrow of reserves   |
+---------------+--------------------------+--------------------------+
| Collections   | Flat Retention           |                          |
|               |                          |                          |
|               | -   24% of straight      |                          |
|               |     collections          |                          |
|               |                          |                          |
|               | -   18.5% of             |                          |
|               |     rehabilitated and    |                          |
|               |     consolidated loans   |                          |
+---------------+--------------------------+--------------------------+

### **Programs and Results**

ASA provided the following summary of its programs and results.

######## 

########  Campaigns

ASA has chosen to perform a series of experiments to determine the best
approach to providing "*...the right message, at the right time."* Based
on the results of these experiments, ASA has extrapolated the *best
practices* achieved and has initially implemented three programs toward
achieving its VFA goals. The *Journeys* program is intended to work
toward delinquency prevention through counseling of borrowers during the
grace period before the repayment period begins; the *Pathways* program
targets borrowers who are delinquent; and, the *Bright Beginnings*
program targets borrowers who are in default.

*Experimentation to Program Implementation*

In 2001, ASA and Affiliated Computer Services, Inc. (ACS) initiated a
pilot program that targeted borrowers that were within 30-45 days of
entering repayment. The purpose of the pilot was to test whether
providing borrowers with enhanced loan counseling as they enter
repayment would improve their ability to pay timely and keep their loans
"healthy". The pilot group received a special mailing that included
information specific to repayment options, budgeting, as well as
deferment and forbearance information. The pilot group also received a
phone call to "check in" with the borrower to see if they had any
questions or if there were any special circumstances that might make it
difficult to repay their student loan. The experiment also included a
control group. The control group did not receive any information other
than the standard letter from the servicer telling them when the
payments are to begin along with the amount.

The results of the experiment were as follows:

  ------------------------------------------ ------------ ----------------
                                             Control      Pilot Group
                                             Group        

  Delinquency Rate                           24.6%        2.6%

  Use of Direct Payment (ACH)                0%           9%

  Use of Graduated Repayment                 4%           10.7%

  Use of Deferment/Forbearance               0%           12%

  Use of Consolidation                       2.6%         14.6%
  ------------------------------------------ ------------ ----------------

Additionally, 9% of the pilot group paid their accounts in full and they
generated 88% fewer phone calls to the servicer.

Based on these results, ASA implemented its *Journeys* program. As part
of this program, ASA targeted all of its borrowers, who graduated
between May and June 2002. As such, approximately 18,000 borrowers
received a special mailing as well as a "check in" phone call.
Furthermore, ASA enhanced the program to include a quarterly newsletter
about personal finance and student loan repayment "tid-bits".

Since this group went into repayment between November and December,
2002, at the time of this writing it is still too soon to see the affect
of this program on ASA's pre-claim submission rate for this population.
However, ASA is tracking this population and will be publishing results
in the future.

Similarly, based on a series of experiments ASA initiated its *Pathways*
program. *Pathways* targets borrowers whose loans have been submitted by
their lenders for default aversion assistance and specifically looks to
augment required due diligence steps by providing information and
tailored counseling techniques based on the borrowers' circumstances.
For example, borrowers who have withdrawn from school receive a
different letter than borrowers who have graduated. Furthermore,
borrowers with a consolidation loan receive a different message than
those who only have Stafford loans. In essence, the *Pathways* program
output is based on a decision tree of borrower circumstances.

ASA has also organized its *Wellness* counselors according to the
borrowers' stage of delinquency. Current counselor groupings are based
on delinquency stages of:

-   90-149 days delinquent

-   150-209 days delinquent

-   210 days +

ASA's most experienced counselors are assigned to work with those
borrowers who are 210+ days delinquent and are aptly named the Critical
Care Unit.

Initial results show that 12% more borrowers cure their accounts with
this approach than those who receive standard due diligence efforts.
Additionally, borrowers who receive the *Pathways* methodology show a 1%
reduction in default. Furthermore, consolidation loan borrowers show an
8% higher cure rate with this technique.

Lastly, ASA's *Bright Beginnings* program targets defaulted borrowers.
Initially ASA marketed the FFELP rehabilitation program to defaulted
borrowers who had not made a payment to the guarantor in four months.
The program sent a brochure *offering* rehabilitation as a way to solve
their defaulted loan problem. Results of these initial mailings brought
a 35% response rate to the mailing of which 90% of those that responded
accepted the offer to join the program. Those that accepted the offer
received monthly letters *thanking* them for their payments and
encouraged them to continue. At the end of the proscribed time period
50% of those who entered the program successfully rehabilitated their
loans.

Subsequent *Bright Beginnings* campaigns targeted newly defaulted
borrowers. Results from this population show a 40% response rate and a
74% acceptance rate. As with the previous population a 50% completion
rate was realized. Since implementing this program ASA has increased its
rehabilitated population by approximately 70%.

*Assisting Schools With Targeted Assistance*

A *Wellness* program for schools began during FY03. As part of this
program, ASA created what is termed as the *Wellness* Institutes. In
this program, ASA trains Financial Aid professionals to be Default
Aversion specialists providing them with the education and tools to work
with their own populations. Additionally, ASA has created a *Wellness*
Profile for its schools with their cohort default rate. Initially, ASA
has targeted schools with higher than average cohort default rates, and
provides specific portfolio information about the school. ASA then
provides the school with customized assistance tailored for their
institution and population needs. For example, one school had a high
withdrawal rate within its freshman class. ASA worked with the school to
develop customized letters for that group as well as specialized reports
to track those borrowers. The effects of this program are not known yet,
but we will evaluate its success once the new cohort default rates are
issued.

*Training to Change the Culture of ASA*

Changing the culture at ASA has been a function of time, senior
management's focus/commitment, and an understanding of the borrower as a
customer. Organizational changes were made to better reflect the core
values of the customer-centric organization. For example, ASA created
the position of Ombudsman to not only resolve individual cases, but also
to look for ways to improve the culture, operations and policies at ASA,
as well as ASA's relationships with other agencies. To that end, ASA
also created a Borrower Services division, and a Borrower Advocacy unit
charged with resolving customer disputes and congressional inquiries. By
integrating the work of the Borrower Advocacy unit with the resolution
capability of Payment Advisors (formerly known as Collectors), dispute
solutions and customer service efforts can be implemented transparently
across departmental lines. The end result is that resolutions are
achieved with staff working in close proximity to other employees,
ensuring greater consistency.

Lastly, staff is receiving specific training designed to have the
employee identify with the individual borrowers through courses on
personal financial management. ASA has also begun to incorporate the
concepts of Customer Relationship Management (CRM) as well as internal
newsletters into its organizational culture.

*Educational Opportunity Centers*

ASA has established a relationship with the Educational Opportunity
Centers (EOC) in Washington D.C., Massachusetts, and Connecticut. ASA
has begun to provide staffing at some EOC sites in order to provide
face-to-face counseling to borrowers. On July 3^rd^, 2001, ASA sent a
direct mailing to defaulted loan borrowers who live near site locations
where ASA has provided staffing. The direct mailing focused on ASA's
rehabilitation program and the opportunity for face-to-face counseling.

For the sites where ASA staffing is not practical, ASA will be holding
one-day seminars for borrowers regarding personal finance and loan
repayment options at the local EOC.

### Weblinks/ Borrower Access to Internet

ASA borrowers can access information regarding their accounts via ASA
Direct™. ASA's web site also provides borrowers/students with tools such
as calculators for award letters, financial aid and budgeting. The web
site also provides information about debt management as well as
electronic forms. See [www.amsa.com](http://www.amsa.com/).

**California Student Aid Commission (CSAC)**

## 

## ***Summary of Agreement***

The CSAC VFA is based on the concept that developing and sustaining
sound debt management practices benefits all borrowers and reduces the
cost of default. Under the VFA, CSAC is using 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 believes that it is preferable to have GAs
concentrate on processes that avert default rather than rely on
post-default collections. To that end, the guarantor is implementing
measures that avert defaults and reduce operational expenses.

CSAC's payment streams for the portion of shared claim savings and
performance-based collections 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 there are specified improvements to the
annual default rate and collection recovery rate. The one exception to
this is the Early Withdrawal Counseling (EWC) program. CSAC receives
monthly payment of the Default Aversion Fee (DAF) for borrowers in the
EWC program. CSAC continues to receive the standard GA payment streams

Additionally, the VFA with CSAC provides that the agency will retain 50
percent of any federal savings from "averted default claims." Averted
default claims are calculated based on the difference between the
default rate of the guarantor and three percent. Also, CSAC's retention
of all default collections increases by one percent for each one percent
improvement in the collection rate of the agency. The formula takes into
consideration ED's collection of CSAC portfolio loans that were assigned
to ED's Debt Collection Services. In order to receive this benefit,
CSAC's collection rate must exceed the national average.

The following chart illustrates CSAC's current fee structure as compared
to the standard GA model:

+----------------+--------------------------+--------------------------+
| Performance    | Regular GA               | CSAC VFA                 |
| Stage          |                          |                          |
+----------------+--------------------------+--------------------------+
| Origination    | Loan Processing and      | Loan Processing and      |
|                | Issuance Fee (LPIF)      | Issuance Fee (LPIF)      |
|                |                          |                          |
|                | -   0.65% of             | -   0.65% of             |
|                |     disbursement         |     disbursement         |
|                |                          |                          |
|                | -   0.40% FY 2003        | -   0.40% FY 2003        |
+----------------+--------------------------+--------------------------+
| In-Sc          | Account Maintenance Fee  | Account Maintenance Fee  |
| hool/Repayment | (AMF)                    | (AMF)                    |
|                |                          |                          |
|                | -   0.10% of outstanding | -   0.10% of outstanding |
|                |     loans                |     loans                |
+----------------+--------------------------+--------------------------+
| Loans in Good  | N/A                      | N/A                      |
| Standing       |                          |                          |
+----------------+--------------------------+--------------------------+
| Delinquency    | Flat Default Aversion    | Flat Default Aversion    |
|                | Fee (DAF)                | Fee (DAF)                |
|                |                          |                          |
|                | -   No rebills           | -   Monthly              |
|                |                          |                          |
|                | -   Refund defaults      | -   No rebills           |
|                |                          |                          |
|                |                          | -   Refund defaults      |
|                |                          |                          |
|                |                          | Early Withdrawal Fee     |
|                |                          | (pilot schools only)     |
|                |                          |                          |
|                |                          | -   Monthly              |
|                |                          |                          |
|                |                          | -   No rebills           |
|                |                          |                          |
|                |                          | -   Refund defaults      |
|                |                          |                          |
|                |                          | Default Prevention       |
|                |                          | Incentive                |
|                |                          |                          |
|                |                          | -   Annual               |
|                |                          |                          |
|                |                          | -   50% of savings in    |
|                |                          |     claim payments       |
|                |                          |     resulting from       |
|                |                          |     default aversion     |
|                |                          |     activities           |
+----------------+--------------------------+--------------------------+
| Default        | 95% Reinsurance          | 95% Reinsurance          |
|                |                          |                          |
|                | -   Loan loss            | -   Loan loss            |
|                |                          |                          |
|                | -   Reserve in Federal   | -   Reserve in Federal   |
|                |     Fund                 |     Fund                 |
+----------------+--------------------------+--------------------------+
| Collections    | Flat Retention           | Variable Retention       |
|                |                          |                          |
|                | -   24% of straight      | -   Collection recovery  |
|                |     collections          |     rate improvement fee |
|                |                          |                          |
|                | -   18.5% of             | -   Annual               |
|                |     rehabilitated and    |                          |
|                |     consolidated loans   | -   Fee based on         |
|                |                          |     improvement in       |
|                |                          |     CSAC\'s collection   |
|                |                          |     recovery rate        |
|                |                          |     compared to the      |
|                |                          |     national average     |
+----------------+--------------------------+--------------------------+

***Programs and Results***

CSAC provided the following summary of its programs and results.

CSAC identified two critical factors in determining the success of its
VFA programs. First, intensified and substantive contact with the
borrower leads to more successful default prevention. Second, staff
training relating to alternative payment options for the borrower allows
CSAC to better inform the borrower of ways to prevent default.

CSAC has modified and enhanced its default aversion activities and
reports that it is already seeing promising results. CSAC's reinsurance
trigger rate of 2.52% for FY 2002 represents a decrease from the rate of
2.61% in FY 2001. This action was based on the results of an analysis of
recently defaulted borrower accounts to determine common
characteristics. Based on this information, CSAC decided to move from an
approach that required the same number of attempts to contact the
borrower, regardless of other factors, to an approach based on risk of
default.

Specifically, the Default Prevention department designed a model to
establish priorities for its work and developed a customized contact
strategy based on risk. The strategy uses a credit score plus other
borrower characteristics, such as outstanding student loan debt,
previous delinquencies and/or defaults, and the number and types of
loans held by the borrower. CSAC began implementation of this model and
the underlying strategic contact campaigns during July 2002. This effort
contributed to the decline in the annual trigger rate.

CSAC also has enhanced its collection efforts and reports its national
average ranking in collection recoveries for FY 2001-02 improved over
the prior year from 18th to 16th place. This ranking represents a
collection recovery rate increase from 23.18% to 26.93%. Total
recoveries increased from \$403.4 million in FY 2000-01 to \$479.7
million for FY 2001-02.

Additionally, in April 2002, the Default Prevention and Claims
departments increased efforts to coordinate departmental activities and
avert defaults at the point a default claim is received. Through this
partnership, the accounts are pulled into a priority calling campaign.
The Claims department started reviewing each claim for likely default
aversion indicators, such as when the borrower has a pending deferment
or forbearance request. Any account with key default aversion indicators
is now referred to Senior Counselors for more intense aversion efforts.
According to the agency, the combined efforts of these departments have
resulted in total claims averted from April to September 2002 of \$6.4
million, an average increase of 70% in dollars averted by CSAC each
month and 114% increase in the number of claims averted. As of February
28, 2003, these efforts have resulted in total claims averted of \$12
million, an average increase of 75% in dollars averted and 93% in the
number of borrowers averted.

Strategically managing the delinquency portfolio and the implementation
of the VFA experiments continue to help CSAC manage its annual default
rate despite the worsening economy. At the same time, CSAC is employing
aggressive practices to increase loan collection recoveries.

Specific CSAC projects include the following:

*Early Withdrawal Counseling*

CSAC has implemented an early withdrawal program designed to avert
defaults by borrowers who withdraw from school prior to completing their
educational program by providing appropriate information regarding
returning to school and/or managing their student loan debt and
repayment obligations. Specifically, counselors present options to the
borrower depending on the borrower's particular situation. For example,
if a student wants to return to school, but needs academic guidance, the
counselor facilitates contact with an academic counselor at the school.
Alternatively, if a borrower does not intend to re-enroll, the counselor
advises the borrower regarding loan repayment options.

As of September 2002, four schools representing each sector were
participating in the pilot program. During this ongoing pilot, the GA
continues to track success through retention, delinquency, and default.
Early reports from the Agency indicate that of the borrowers counseled,
39% are in a positive repayment status or are planning to repay, and an
additional 22% have re-enrolled in school or are planning to re-enroll.
Eight percent have entered delinquency. As of February 2003, six schools
are now participating in the pilot program.

In order to facilitate the Early Withdrawal Counseling program CSAC must
obtain the withdrawn student's information as soon as possible. It has
attempted to obtain this data directly from the participating schools
but have found that the most efficient means of data exchange has been
facilitated through the National Student Clearinghouse (Clearinghouse).
Once the school agrees to participate in the program, CSAC accesses the
withdrawn borrower's information directly from the Clearinghouse, making
this a passive reporting process for the school. Since the
implementation of the Clearinghouse process, CSAC has experienced a
significant increase in the number of schools who have expressed their
desire to participate in the program. To date, CSAC has contacted 1,808
borrowers from six pilot schools that were specifically identified to
represent various school segments and types. Unfortunately, it is still
too early to measure the overall impact to the delinquency rate and the
subsequent default rate.

*High-Risk Borrower Consolidation Counseling*

CSAC continues to provide tools and enhanced training for new and
existing default prevention counselors to help them assist the borrower
in assessing the benefits of consolidating under the Federal (FFEL)
Consolidation program or the William D. Ford Direct Loan (Direct)
Consolidation program. Specifically, CSAC implemented the use of the
"Direct online" application in April 2002, and the use of a predictive
model to prioritize call strategies in July 2002.

From June 2001 through September 2002, CSAC referred 1,751 borrowers to
the two consolidation programs, which is approximately 1.5% of the total
average monthly delinquent portfolio. Between June 2001 and September
2002, 19% of the referrals were "booked" as consolidations.

The following information is tracked monthly and is reported on an
ongoing basis:

+------------+-----------------+---------------+----------------------+
| Referral   | Number of       | Number of     | Number of FFEL       |
| Dates      | Referrals       | Direct        | Booked               |
|            |                 |               |                      |
|            |                 | Booked        |                      |
+------------+-----------------+---------------+----------------------+
| 06/01 --   | 1,751           | 305           | 28                   |
| 09/02      |                 |               |                      |
+------------+-----------------+---------------+----------------------+

*Single Point of Contact for Delinquency Servicing*

CSAC began preliminary discussions regarding single point of contact for
delinquency servicing with three major lenders/servicers during FY
01-02, but has not entered into any agreements at this time. Lenders and
servicers are analyzing whether it would be cost efficient to alter
existing systems and practices in order to participate in this servicing
pilot. Thus, the lLenders and servicers are still giving this
opportunity serious consideration, but have not yet submitted a proposal
to participate.

*are expected to increase after July 1, 2002, due to the Direct Loan
Program holding applications until after the interest rate changes. At
this time it is difficult to track whether the loans booked into the
Direct loan program are still in good standing because they are no
longer in FFEL program.*

*Performance Based Collection Standards -- Credit Scoring and Portfolio
Analysis*

Upon approval of the CSAC VFA, CSAC's Collections division developed
tools to address the VFA focus of sound debt management practices and
reducing the cost of default. The division focused on gaining
efficiencies in the collection process. The first determination made was
to extend the number of days CSAC's Collections department works the
accounts, from 90 days to 270 days and to create a "Billing unit" within
the Collections department. The Billing unit handles all incoming calls
to the Collections department and contacts borrowers who are past due on
their payments. This allows the Collectors to focus solely on contacting
borrowers and setting them up in a repayment plan best suited to their
ability to repay their debt. Efficiencies are evidenced by the reduction
of collection costs decreasing from 22.7% in FY 2001 to 14.8% for every
dollar collected in principal and interest in 2002. Recoveries for FY
2000 were \$385,900,000 and 19.16% for every dollar collected and for FY
2001 recoveries were \$403,400,000 and 18% for every dollar collected.

Another need addressed for the VFA included a review of the Internal
Collection dialer pools and the staff schedules. Staff was added and
shifts were adjusted so the contact attempts occurred at hours most
likely to result in borrower contact. Lastly, the Collections department
created an incentive plan to compensate Collectors for their success.
These changes have increased dialer pool coverage by 6% over the
previous fiscal year, which resulted in 22,658 additional contacts since
September 2001.

After the implementation of the changes to the dialer pools, the number
of accounts worked per day by the Collectors increased by 40%; the
number of accounts worked by the unit in a month increased by 60%. The
contact rate increased to 30% of calls and the abandoned call rate
dropped from 6% to 3%.

Because of the increase in accounts collected in-house, CSAC created a
Skip Tracing unit to assist the Collections department in contacting
borrowers. The Skip Tracing unit utilizes information from credit
reports, the California Employee Development Department, National
Database of New Hires, and other numerous tools such as the Internet to
locate borrower demographic information

According to CSAC, the most successful aspect of the VFA initiative
related to collections is the implementation of the income to debt ratio
matrix. The matrix assists the Collectors in determining the repayment
method that meets the borrower's needs and maximizes recovery. Once the
Collector has determined the borrower's true financial situation, the
income to debt ratio scoring matrix helps the Collector counsel the
borrower on the repayment option which best meets the borrower's fiscal
needs and requirements.

As of June 2002, reports show the income to debt ratio scoring is
successful. Since the implementation of the matrix, collections have
steadily increased each month. CSAC found that by educating its
borrowers on the pros and cons associated with rehabilitation, FFEL
consolidation, and the William D. Ford consolidation program, its
borrowers have a greater understanding of their repayment options. The
findings support that borrowers with an understanding of financial
commitment tend to stay in repayment, which is evidenced by the increase
in collection recoveries.

The implementation of the scoring matrix and the other changes to the
Collections department required enhancing its training program. The new
training program expands the Collectors' knowledge base by providing an
in-depth explanation of the various repayment options for a borrower and
how to determine which method best suits a specific financial situation.
Collectors are taught to probe the borrower to reveal the root cause of
their default and how the collector may assist them in their situation.
This resulted in issues being resolved quicker and in borrowers willing
to establish payment arrangements.

*Portfolio Analysis*

CSAC created a portfolio analysis position to assist with default asset
management. The Analyst has researched and evaluated alternative
collection strategies and developed a model to forecast collection
recoveries.

Prior to implementation of the VFA, CSAC processed all accounts through
its Collections department, its Administrative Wage Garnishment (AWG)
department and through its external collection agencies regardless of
the collect-ability of the loan. Since the VFA, CSAC's Collections
division created an enhanced portfolio analysis program to determine the
best collection strategy for each debt based on the borrower's financial
situation. This has allowed CSAC to retain the most collectable accounts
for internal collections and AWG. The collection efficiencies have
resulted in a greater recovery rate and reduced agency fees and
incentives. According to CSAC, the greatest benefit has been to the
borrower because the Collector can now advise the borrower on optimal
repayment methods.

*Inter-agency Transfer of Accounts*

This project began in December 2001 and allows CSAC to work with other
GAs to exchange defaulted accounts to increase the potential for
collection due to factors such as geographic location of state-specific
enforcement authority.

As of September 2002, three GAs have contacted CSAC inquiring about the
project. CSAC is pursuing additional discussions with these guarantors
and expects to increase interest amongst the other guarantors.

**Great Lakes Higher Education Guaranty Corporation**

### **Summary of Agreement**

The VFA between Great Lakes and ED extends and improves a pilot program
previously initiated by ED and the guarantor. In 1996, ED and Great
Lakes 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 GA revenue 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.

## 

Under the VFA, Great Lakes does not receive *any* of the payments
currently provided under the standard GA 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 based on the performance of the guarantor in
default and delinquency prevention. The VFA between Great Lakes and ED
emphasizes default aversion activities and a reduction in the number 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 Great Lakes. This fee is calculated 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 Great Lakes. The second factor is the original principal balance
of outstanding loans. This outstanding loan balance is the same amount
used to calculate AMF payments under the standard guarantor payment
model. The basis point fee is multiplied by the principal balance of
open loans to determine the amount of the GA payment under the VFA.

Great Lakes' cure rate is measured quarterly. The cure rate calculation
does not include loan forgiveness "purchases" such as death, bankruptcy,
and total and permanent disability. The numerator is the total number of
loans cured; the denominator is the sum of the number of loans cured and
the number of loans defaulted. The result is the percent of defaulted
loans that were prevented.

The claim payment process under Great Lakes' VFA financial model has
been modified to provide for weekly fund transfers from ED.
Specifically, Great Lakes calculates and requests from ED the total
amount of funds needed to pay claims on a weekly basis. The VFA
supplemental invoice utilized for the quarterly performance-based fee
billing is also used for weekly claim estimates. At the beginning of the
week, default claims are estimated based on a scan of Great Lakes'
database of default claims that are scheduled to be paid the following
Monday. Great Lakes estimates the amount needed for non-default claims
based on the previous month's results. Each Monday, the GA pays approved
claims that were received 54 to 60 days prior to the weekly claim
payment date. Great Lakes pays claims to lenders by check. ED pays the
amount invoiced by Great Lakes via ACH -- usually by the end of the week
in which the estimate was submitted. During the third and fourth week of
the month, Great Lakes compares the estimates provided for the first and
second weeks of the month to the actual purchases (claims paid) and then
makes adjustments to the third and fourth weeks' estimates,
respectively.

Under the VFA, ED reimburses 100% of claim payments, as opposed to 95%,
98% and 100% in the standard model depending on the date of the first
disbursement. 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
statutory established collection retention and the actual costs of
collection. The terms of the agreement with Great Lakes 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.

The following chart illustrates Great Lakes' current fee structure as
compared to the standard GA model:

+----------------+--------------------------+--------------------------+
| Performance    | Regular GA               | Great Lakes VFA          |
| Stage          |                          |                          |
+----------------+--------------------------+--------------------------+
| Origination    | Loan Processing and      | Included in Performance  |
|                | Issuance Fee (LPIF)      | Based Fee (PBF)          |
|                |                          |                          |
|                | -   0.65% of             | -   LPIF payment process |
|                |     disbursement         |     used by ED to make   |
|                |                          |     partial payment of   |
|                | -   0.40% FY 2003        |     PBF                  |
+----------------+--------------------------+--------------------------+
| In-Sc          | Account Maintenance Fee  | Included in Performance  |
| hool/Repayment | (AMF)                    | Based Fee (PBF)          |
|                |                          |                          |
|                | -   0.10% of outstanding | -   AMF payment process  |
|                |     loans                |     used by ED to make   |
|                |                          |     partial payment of   |
|                |                          |     PBF                  |
+----------------+--------------------------+--------------------------+
| Loans in Good  | N/A                      | N/A                      |
| Standing       |                          |                          |
+----------------+--------------------------+--------------------------+
| Delinquency    | Flat Default Aversion    | Performance Based Fee    |
|                | Fee (DAF)                | (PBF)                    |
|                |                          |                          |
|                | -   No rebills           | -   Loans outstanding    |
|                |                          |     times a sliding fee  |
|                | ```{=html}               |     based on periodic    |
|                | <!-- -->                 |     referred delinquent  |
|                | ```                      |     account cure rate    |
|                | -   Refund defaults      |                          |
+----------------+--------------------------+--------------------------+
| Default        | 95% Reinsurance          | 100% Payment of Claims   |
|                |                          |                          |
|                | -   Loan loss            | -   Weekly claims        |
|                |                          |     advanced by ED       |
|                | -   Reserve in Federal   |                          |
|                |     Fund                 | ```{=html}               |
|                |                          | <!-- -->                 |
|                |                          | ```                      |
|                |                          | -   Escrow of reserves   |
+----------------+--------------------------+--------------------------+
| Collections    | Flat Retention           | Flat Retention           |
|                |                          |                          |
|                | -   24% of straight      | -   Net collection costs |
|                |     collections          |                          |
|                |                          |                          |
|                | -   18.5% of             |                          |
|                |     rehabilitated and    |                          |
|                |     consolidated loans   |                          |
+----------------+--------------------------+--------------------------+

***Programs and Results***

Great Lakes provided the following information regarding its programs
and results.

Great Lakes 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 has evaluated, redesigned and reengineered processes to
accommodate new technologies. As processes have been identified and
enhanced, Great Lakes has recruited, trained, and developed skills of
agency staff in using the new technologies and processes.

The initiatives are an extension of the default aversion pilot program
of 1996-98. During that period, Great Lakes, 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 rather than process in the GA model, and served as the incubator
for many of the present initiatives contained in the Great Lakes' VFA.

Great Lakes believes that its VFA properly focuses a GA's efforts on
borrower benefit -- outreach, default aversion and rehabilitation. The
alignment of the revenue stream with this philosophy has allowed Great
Lakes to pilot a number of default aversion initiatives that they may
not have otherwise attempted.

*Rehabilitation Collections*

Great Lakes helped 7,819 borrowers rehabilitate \$57.3 million in
outstanding defaulted loans during the twelve months ended September 30,
2002. To rehabilitate a defaulted student loan, a borrower must make 12
consecutive on-time full monthly loan payments. After the required
payments have been made, Great Lakes sells the rehabilitated loan to a
lender. Rehabilitation allows borrowers to regain all the benefits of
the FFEL program, including any remaining deferments or forbearance
eligibility, restore eligibility for additional student financial aid
and remove the loan default from their credit record.

Great Lakes entered into an agreement to participate in the loan
rehabilitation program with ED in 1992. Since that time, Great Lakes has
encouraged its external post-default collection vendors to promote the
benefits of the loan rehabilitation program to defaulted borrowers. The
number of borrowers who have qualified for the loan rehabilitation
program has increased significantly since the inception of the VFA
program. This increase can be attributed to modifications to Great
Lakes' collection vendor commission fee structure and the elimination of
the assessment of collection costs at the time of rehabilitation.

To better align the commission fee structure with Great Lakes'
philosophy related to the benefits of the rehabilitation program, Great
Lakes modified its collection agency contracts on April 1, 2000. These
changes increased the incentives available to the collection agencies if
they adopted Great Lakes' rehabilitation strategy. The chart below
outlines those changes in the incentive structure.

Additionally, prior to April 2001, Great Lakes assessed collection costs
equal to 18.5% of the outstanding principal and accrued interest loan
balance as set forth in the regulations. This offsets the positive
benefits associated with the rehabilitation program.

These two changes produced a 132% increase in the principal and interest
amount rehabilitated between the 12 months ended September 30, 2001 and
September 30, 2002 as follows:

  ----------------- ----------------- ----------------- -----------------
  10/01/00 --                         10/01/01 --       
  9/30/01                             9/30/02           

  Number of Loans   Principal &       Number of Loans   Principal &
                    Interest                            Interest
                    Rehabilitated                       Rehabilitated

  4,162             \$24,669,912.88   7,818             \$57,344,834.82
  ----------------- ----------------- ----------------- -----------------

Further, Great Lakes' rehabilitation collections represent more than 44%
of collections on defaulted loans during the twelve months ending on
September 30, 2002. This compares to an average of 8% for all other
guaranty agencies during the same period. Great Lakes' rehabilitation
collections increased to 63% of its total defaulted loan collections for
the three months ended December 31, 2002.

Great Lakes believes that the ability to align GA revenues and
third-party compensation strategies with the philosophy behind the VFA
has been crucial to its success in the area of rehabilitation.

Lastly, Great Lakes explains that the collection recovery rate has
decreased since FY 2000 because it takes twelve months for a borrower to
complete a rehabilitation agreement. It believes that higher numbers of
rehabilitated loans and lower default recoveries are of more benefit to
the borrower, the lender and ED than are lower numbers of rehabilitated
loans and higher default recoveries, particularly where those default
recoveries are a result of default consolidation.

To allow even more defaulted borrowers to take advantage of the
rehabilitation program, Great Lakes created a new program to extend the
benefits of its rehabilitation program to borrowers with high
outstanding loan amounts who have previously been unable to participate
due to excessive payments required during the rehabilitation period.
Under Great Lakes' original rehabilitation program, the borrower's
monthly payment is calculated as the amount necessary to amortize the
borrower's loan over a ten-year repayment period. Many borrowers have
multiple loans that, when aggregated and amortized over a ten year
repayment period, result in monthly payments the borrowers cannot
afford. As a result, these borrowers cannot afford to earn the benefits
made available via the current rehabilitation program. Great Lakes'
expansion of the rehabilitation program through its balance-sensitive
extension will allow a borrower who has defaulted loans totaling
\$10,000 or more to make rehabilitation period payments equal to the
amount the borrower would be required to make after the defaulted loans
are rehabilitated and then consolidated into a single loan with the
maximum repayment term allowed.

### Other Initiatives

In addition to the rehabilitation projects currently in effect at Great
Lakes, the agency has developed the following programs to fulfill the
objectives of the VFA:

> *Loan Counselor Training*
>
> Improved customer service training is part of Great Lakes' on-going
> attempt to connect with the borrower. Specifically, Great Lakes has
> used *Achieve Global's* "Achieving Extraordinary Customer Relations --
> Skills and Strategies for Call Centers" to give their Loan Counselors
> a better understanding of the service they want each and every one of
> their borrowers to receive. The program helped their Loan Counselors
> to accomplish the following:

-   Identify customers within the organization.

```{=html}
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```
-   Learn how to handle potentially unproductive interactions.

```{=html}
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```
-   Create positive, memorable customer experiences for all customers.

> Great Lakes believes that by improving customer service, they can
> better provide borrower counseling and assistance to prevent defaults.
>
> To enhance telephone skills for borrower counseling and assistance,
> Great Lakes provided its Loan Counselors with a series of training
> sessions during November 2002 designed to maximize the effectiveness
> of successful contacts with delinquent borrowers. The training
> sessions introduced Great Lakes' default aversion counseling strategy
> aimed at providing the borrower with the most appropriate strategy for
> resolving the underlying cause of the borrower's delinquency. This
> strategy focuses on obtaining a permanent cure for the delinquency.

## *Borrower Outreach*

-   [Interactive Web Site -]{.underline} Great Lakes' Web site,
    [*www.mygreatlakes.com*](http://www.mygreatlakes.com/), includes
    several tools to either prevent or resolve a borrower's delinquency.
    Great Lakes' "deferment and forbearance wizard" presents the
    borrower with a customized listing of the deferment and forbearance
    options available based on the borrower's first disbursement date,
    loan type and remaining deferment or forbearance eligibility. The
    wizard then prompts the borrower to answer a series of questions to
    identify which option best meets the borrower's needs. Once
    identified, the borrower may download the applicable form formatted
    with the borrower's name and address as well as the name and address
    of the applicable lender or servicer.

-   [Live Web Chat]{.underline} - Great Lakes' Web site also includes a
    section devoted to delinquent borrowers for whom lenders have
    requested default aversion assistance. This section provides
    borrowers with a listing of their delinquent loans, the number of
    days each loan is delinquent, and the name, address and telephone
    number of each lender or servicer. Options available to resolve the
    delinquency, as well as specific information related to the option
    selected, is also displayed. If borrowers have questions about the
    various delinquency resolution options, they may either request a
    Loan Counselor contact them via telephone or initiate a one-on-one
    Web chat with a Loan Counselor. These options allow Great Lakes to
    engage in immediate dialogues with delinquent borrowers and
    instantly deliver real-time information needed to resolve the
    delinquency.

-   [Telephone Contact]{.underline} - Great Lakes' Repayment Solutions
    department staffing model is structured around the times that result
    in the highest borrower contact rates. These times include early
    mornings (8:00 AM to 10:00 AM, Monday through Friday), late
    afternoons and evenings (3:00 PM to 9:00 PM, Monday through
    Thursday), Saturdays (8:00 AM to 4:30 PM) and Sunday evenings (4:00
    PM to 9:00 PM).

```{=html}
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```
-   [Skip Tracing]{.underline} - Great Lakes implemented a three-phase
    phone number location program to increase the chance of contacting
    borrowers for whom the agency does not have a valid telephone
    number. Upon learning that the phone number on its system is not
    valid, Great Lakes refers the borrower to an external vendor for a
    one day attempt to obtain a telephone number. If this vendor is not
    successful, the borrower is referred to a second vendor for a
    full-blown skip tracing attempt to obtain the borrower's residence
    or work telephone number. If the vendor is unable to locate a
    telephone number after 90 days, Great Lakes refers the borrower back
    to the original external vendor for a one day attempt to obtain a
    telephone number. In May 2002, Great Lakes began to assign telephone
    numbers for skip borrowers obtained by its phone location vendors to
    the highest priority in auto-dialer campaigns. Since the phone
    numbers obtained by the vendors are often valid for a short period
    of time, the ability to attempt contact immediately upon obtaining a
    number for the borrower increases Great Lakes' chances for
    contacting the borrower.

```{=html}
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```
-   [Customized Letters]{.underline} - Great Lakes uses a number of
    customized mailing campaigns to target specific populations of
    delinquent borrowers. One such campaign includes a letter that
    notifies borrowers when their lender or servicer files a default
    claim with Great Lakes. This letter, sent in a special envelope
    manually addressed to the borrower, spells out the consequences of
    default and encourages the borrower to contact Great Lakes for
    assistance in resolving the delinquency before the loan defaults.

-   [Predictive Model]{.underline} - To identify the most efficient and
    effective resolution strategy for delinquent borrowers, Great Lakes
    is working with a partner to develop a customized scoring model that
    will provide a numerical indication of the likelihood of a
    delinquent loan to either cure or default. The model will be
    continuously updated based on Great Lakes' most recent default
    aversion experiences, thus enabling Great Lakes to apply specific
    resources and techniques in a manner that will maximize the number
    of cures.

###### *Entrance and Exit Counseling*

> FASTFacts™, Great Lakes' Web-based Entrance and Exit Counseling tool
> for Title IV loans, was designed for schools to provide their students
> a fast, easy, and comprehensive way to complete ED's Entrance and Exit
> counseling requirements. The Entrance and Exit Counseling Web site can
> be completely customized by a school and is integrated into the
> school's site to make counseling a seamless process for its students.
> In addition to providing schools with customized study guides, exams
> and reports, FASTFacts™ provides students with a comprehensive listing
> of their student loan indebtedness during Exit Counseling.

## *Assistance to Schools*

To assist schools in their cohort default rate management efforts, Great
Lakes provides schools with a comprehensive monthly report that contains
information about the schools' current and former students for whom
Great Lakes is providing default aversion assistance on behalf of the
lender. Recent enhancements to this report provide schools with multiple
format and delivery options. Schools may elect to have Great Lakes
either mail the report or deliver it electronically via Great Lakes' Web
site. The electronic version of the report allows schools to easily
create customized letters and mailing labels for delinquent borrowers.
It also provides schools with a new tool for analyzing delinquent loan
data in connection with their internal default prevention efforts.

> *Claims Cure Action Team*
>
> Upon the receipt of a claim from a lender, Great Lakes' newly created
> Claims Cure Action Team performs a detailed review of the borrower's
> file to identify potential default aversion activities that Great
> Lakes may attempt prior to the payment of the claim. The Claims Cure
> Action Team is made up of Claim Examiners in the Claim Examination
> unit. Claim Examiners are often able to identify borrowers who may
> have "slipped through the cracks" and not been contacted by telephone
> regarding their delinquent loans. Sometimes the Examiners can
> determine the best time of day or night to call the borrower or
> identify a reliable reference that will know where and when to reach
> the borrower. The Claims Cure Action Team forwards suggested default
> aversion activities to the Repayment Solutions department for
> follow-through.

### Certified Compliant Servicer

> To pilot a new approach to the processing and payment of default
> claims, Great Lakes has entered into agreements with Wells Fargo,
> PHEAA Servicing Center, EFS, and Great Lakes Educational Loan
> Services, Inc. Under the standard model, guarantors examine each claim
> before payment. Under the Certified Compliant Servicer (CCS) program,
> servicers' claims are examined after payment based on statistical
> sampling.
>
> The servicers were certified as eligible for CCS based on tests of
> recently paid claims and their annual independent compliance audit
> reports. Quarterly and annual samples are taken of CCS-paid claims.
> High compliance ratings must be maintained to continue in the CCS
> program. The CCS program builds upon a recent industry initiative
> involving the use of the common claim form. As part of that
> initiative, some of the claim-by-claim examination processes have been
> shifted to the program review process. The post-claim random sampling
> of claims is an extension of that shift and provides for a formalized,
> on-going testing process.

### Great Lakes VFA Amendment

> After the original Great Lakes VFA was executed, Great Lakes proposed
> an amendment to its agreement. The amendment provides a limited
> exemption to the regulation that generally prohibits a GA from
> contracting with the same entity for different collection activities
> on the same loan. The amendment allows Great Lakes to use the same
> entity for post-default collection assistance and default aversion
> assistance, but only for telephone location services. The amendment
> was posted on the Internet for public comment, submitted to Congress
> for a 30-day review, and signed by ED in July 2002.

**Texas Guaranteed Student Loan Corporation**

## ***Summary of Agreement***

The Texas Guaranteed Student Loan Corporation (TG) VFA is designed to
test a variety of methods to reduce student loan delinquencies and
defaults. By doing so, TG intends to ultimately lower the costs of the
FFEL program for ED and for taxpayers. The TG 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. This emphasis allows both ED and the guarantor to test
whether the elements of the TG 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 TG earns under the VFA payment model is based on a variable rate
performance-based system. The system is weighted toward the results of
delinquency and default prevention activities. This changes the focus of
the payment model from a primarily post-default revenue system that may
have served as a disincentive to maximizing investment in delinquency
and default prevention efforts.

The terms of the agreement with TG include the deposit of the agency's
Federal Fund into a limited access escrow account. Consequently, TG 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. Specifically, on Thursday of each week, TG submits an estimated
reinsurance request to ED using ED's on-line Oracle system. The estimate
is based upon TG's system queue of claims payments to loan holders
scheduled for the following Tuesday. TG then produces and distributes
the claim checks to the holders each Tuesday. The checks begin clearing
the agency's bank account by the following Friday, necessitating receipt
of funds prior to that date to avoid rejection of presentment for
insufficient funds.

The TG VFA incorporates performance-based measurement of certain
quantifiable factors to determine payment. The delinquency prevention
rate 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.
Another fee is the Default Aversion Fee, which measures the guarantor's
effectiveness in averting default of delinquent student loans. A third
fee is the Collections Fee. It measures the effectiveness of the
guarantor in collecting on its defaulted loan portfolio.

The following chart illustrates TGs' current fee structure as compared
to the standard GA model:

+----------------+--------------------------+--------------------------+
| Performance    | Regular GA               | Texas VFA                |
| Stage          |                          |                          |
+----------------+--------------------------+--------------------------+
| Origination    | Loan Processing and      | Loan Processing and      |
|                | Issuance Fee (LPIF)      | Issuance Fee (LPIF)      |
|                |                          |                          |
|                | -   0.65% of             | -   Monthly              |
|                |     disbursement         |                          |
|                |                          | -   0.65% of             |
|                | -   0.40% FY 2003        |     disbursement         |
|                |                          |                          |
|                |                          | -   0.40% FY 2003        |
+----------------+--------------------------+--------------------------+
| In-Sc          | Account Maintenance Fee  | Account Maintenance Fee  |
| hool/Repayment | (AMF)                    | (AMF)                    |
|                |                          |                          |
|                | -   0.10% of outstanding | -   Monthly              |
|                |     loans                |                          |
|                |                          | ```{=html}               |
|                |                          | <!-- -->                 |
|                |                          | ```                      |
|                |                          | -   0.10% of outstanding |
|                |                          |     loans                |
+----------------+--------------------------+--------------------------+
| Loans in Good  |                          | Delinquency Prevention   |
| Standing       |                          | Fee (DPF)                |
|                |                          |                          |
|                |                          | -   Monthly              |
|                |                          |                          |
|                |                          | ```{=html}               |
|                |                          | <!-- -->                 |
|                |                          | ```                      |
|                |                          | -   0.05% to 0.12% of    |
|                |                          |     loans in             |
|                |                          |     repayment[^7]        |
+----------------+--------------------------+--------------------------+
| Delinquency    | Flat Default Aversion    | Variable Default         |
|                | 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        |
|                |                          |     advanced by ED       |
|                | -   Reserve in Federal   |                          |
|                |     Fund                 | ```{=html}               |
|                |                          | <!-- -->                 |
|                |                          | ```                      |
|                |                          | -   Escrow of reserves   |
+----------------+--------------------------+--------------------------+
| Collections    | Flat Retention           | Variable Retention       |
|                |                          |                          |
|                | -   24% of straight      | -   Annual               |
|                |     collections          |                          |
|                |                          | ```{=html}               |
|                | -   18.5% of             | <!-- -->                 |
|                |     rehabilitated and    | ```                      |
|                |     consolidated loans   | -   19.5% to 23% of      |
|                |                          |     straight collections |
|                |                          |                          |
|                |                          | ```{=html}               |
|                |                          | <!-- -->                 |
|                |                          | ```                      |
|                |                          | -   18.5% to 20% of      |
|                |                          |     rehabilitated and    |
|                |                          |     consolidated loans   |
+----------------+--------------------------+--------------------------+

While TG's basic business processes have not been significantly altered,
the performance-based component of the VFA has caused the agency to
closely monitor its performance and to rapidly analyze deviations from
expected targets. For example, when cure rates began to decline and
claims received began to increase at the beginning of FY 2002, TG was
able to pinpoint the issue to a servicer merger that had occurred months
earlier. By understanding the factors contributing to the declining cure
rate, the agency was able to develop strategies, in conjunction with the
servicer, specifically designed to address the issue.

***Programs and Results***

TG provided the following information regarding its programs and
results.

The following compares TG's performance in FY 2001 and FY 2002 in
relation to its performance-based targets. Also included is FY 2003
information to date:

  --------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
  Measure         Baseline   Jul-01   Aug-01   Sep-01   Oct-01   Nov-01   Dec-01   Jan-02   Feb-02   Mar-02   Apr-02

  Delinquency     30% or     31.05%   31.34%   32.46%   31.61%   29.31%   30.18%   30.58%   32.82%   33.30%   32.46%
  Prevention Rate more                                                                                        

  Delinquency     \> 88%     88.70%   89.18%   89.16%   89.73%   88.96%   86.74%   88.87%   88.07%   88.65%   91.28%
  Cure Rate                                                                                                   

  Default         \> 22%     25.90%   25.90%   25.84%   23.47%   23.50%   23.50%   22.88%   24.09%   25.19%   25.98%
  Recovery Rate                                                                                               

  Claims          7 days or  2.50     3.80     4.25     6.60     5.00     10.00    6.20     12.00    5.50     3.40
  Reimbursement   \<                                                                                          
  Cycle                                                                                                       

  Monthly         10 days or 14.00    9.00     9.71     11.00    11.00    6.00     9.00     6.00     2.00     8.00
  Settlement      \<                                                                                          
  Cycle                                                                                                       

                                                                                                              

  Measure         Baseline   May-02   Jun-02   Jul-02   Aug-02   Sep-02   Oct-02   Nov-02   Dec-02   Jan-03   Feb-03

  Delinquency     30% or     32.53%   31.98%   31.82%   31.73%   32.51%   25.49%   24.20%   26.23%   27.71%   30.77%
  Prevention Rate more                                                                                        

  Delinquency     \> 88%     91.65%   92.00%   91.23%   92.41%   92.34%   92.15%   90.61%   88.90%   90.65%   90.10%
  Cure Rate                                                                                                   

  Default         \> 22%     26.65%   25.82%   27.00%   27.21%   27.60%   26.68%   23.36%   23.55%   25.02%   25.16%
  Recovery Rate                                                                                               

  Claims          7 days or  6.25     4.25     4.80     5.00     3.20     5.00     3.75     5.00     5.50     3.25
  Reimbursement   \<                                                                                          
  Cycle                                                                                                       

  Monthly         10 days or 3.00     3.00     4.00     4.00     11.00    21.00    8.00     4.00     1.00     3.00
  Settlement      \<                                                                                          
  Cycle                                                                                                       
  --------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------

It is important to note that there is not a standard cure rate
calculation for the student loan industry, therefore, performance
results should be measured according to improvement relative to each GAs
performance, instead of GA cure rates relative to each other.

*Debt Collection*

TG has seen positive results relating to debt collection since the VFA
began in 2001. Specifically, TG has found success in improving debt
collections with the use of the National Database of New Hires (NDNH).
The program checks the list of borrowers in default with the NDNH
database, making it easier to find those borrowers unwilling to enter
into voluntary repayment plans. During FY 2002, TG estimates that it has
recovered more than \$1,132,499 through use of this database. During the
first five months of FY 2003, TG has recovered more than \$971,228 using
the NDNH match.

Additionally, ED's prohibition on subrogation at the end of last year
caused TG to immediately test its pilot to keep accounts in their
portfolio longer than five years. This resulted in increased recoveries
due to tax offset. They estimate that over \$24 million in gross
recoveries have been collected on this group of accounts from October
2001 through March 2003.

Lastly, in order to test TG's ability to collect fourth placement
accounts internally as opposed to placing them with an external
collections attorney, the agency "pulled back" all fourth placement
accounts and established a collections team to focus specifically on
these accounts. The results exceeded expectations with more than \$6.3
million in gross recoveries generated by the team through FY 2002 and
\$5.7 million to date during FY 2003. [^8] Gross recoveries averaged
\$180,000 per month for this portfolio when placed with an external
collections attorney. In comparison, during FY 2002, gross recoveries
averaged \$525,000 per month and \$1.1 million per month to date in FY
2003 when collected internally by TG.

*Delinquency Prevention and Curative Actions*

*Pre-Delinquency Counseling*

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 TG's pre-delinquency activities is to
counsel, advise, and guide borrowers toward becoming successful in the
repayment of their student loan(s), to promote the continuance of post
secondary education and to effectively impact the reduction of cohort
and delinquency rates.

To achieve its pre-delinquency goals, TG has hired pre-delinquency
counselors to provide counseling services to borrowers who withdraw or
otherwise drop out of school. Counseling efforts include:

-   Encouraging borrowers to re-enroll in a postsecondary education
    institution and informing borrowers about the social and economic
    benefits of a postsecondary education.

-   Identifying the reason(s) for the student's decision to leave school
    and helping the student assess available options for re-enrollment.
    Counseling efforts may require assertive and proactive contact with
    the borrower and the respective institution. Specific contact with
    the institution's Registrar and Admission Offices may be needed.

-   Contacting borrowers to provide counseling services to students who
    are approaching the repayment process and/or who may already be
    delinquent on their loan(s).

-   Educating and informing borrowers regarding their account status,
    available options and default consequences.

-   Informing borrowers about the qualifications for deferments and
    forbearances as well as the various repayment plans.

-   Providing informed financial guidance as it relates to the repayment
    of student loan debt and credit management. As needed, counselors
    will provide tools and solutions related to creating a budget, i.e.,
    forms, personal finance, Web-based information referral, campus
    offices, and provide employment guidance.

The goal of the program is to provide borrowers with the necessary
information in a timely fashion to ensure a successful repayment of the
student loan obligation. Borrowers are bombarded with information from
the lender/servicer/guarantor community during the entire life cycle of
the loan. Often, the information that borrowers need to successfully
repay their loans is distributed during entrance or exit counseling.
There is a window of opportunity (the six month grace period), which is
largely untapped. Typically, borrowers get a disclosure statement 30
days prior to the end of the grace period. TG's strategy is to ensure
that the borrower is in a position to repay, which includes providing
them with their options, so that they can determine the best route when
they are not already able to do so. Thus it prevents a delinquency from
occurring and ultimately it prevents the need for a default aversion
assistance request.

The net result is that TG will implement various strategies to
positively impact cohort default rates, increase the student loan
repayment base and maximize VFA opportunities. This endeavor also
increases borrower awareness of TG earlier in the repayment life cycle
and creates a more informed borrower. The likelihood of borrower
delinquency and default decreases as TG continues efforts in the area of
default aversion education. Delinquency prevention activities like these
assist schools with counseling, default prevention assistance and cohort
default rates and compliments TG's due diligence activities.

[]{.mark}

During the first seven months of this program, over 55,000 outbound
calls were made by pre-delinquency counselors and over 64,000 portfolios
containing information intended to allow borrowers to successfully enter
repayment were mailed to borrowers in their six month grace period.

*Claims Pending Program*

In February 2002, TG began a pilot program that focused on loan accounts
that were in a claim pending status. The GA gave these borrowers extra
attention and follow-up advice regarding the consequences of paying
these claims. TG found that most borrowers waited until the last minute
to do anything about their delinquencies and needed further assistance
and guidance to get their loans recalled. This more intensive counseling
has been successful \-- TG has seen an increase in recalled loans since
this work began. Previously, the claim area received 300 recalls of
claims filed per month. Since starting this initiative the average has
increased to 500 recalls of claims filed. As a result of the success of
this pilot, in June 2002, TG hired a separate team to work only claim
pending accounts. Intensive counseling of these borrowers along with
daily follow-up to servicers has shown this style of counseling has an
impact.

*DAAR Submission*

The TG VFA permits the agency to establish a shorter filing window for
lenders to submit a Default Aversion Assistance Request (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 TG 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. By
changing the filing window to receive DAARs at day 60, the cure rate
rose from 89.88% to over 91%. This suggests that an earlier
industry-wide effort improves delinquency performance.

TG worked closely with the Student Loan Servicing Alliance (SLSA) during
the implementation phase of the mandatory 60-70 day DAAR filing window.
After reviewing the proposed policy with the SLSA members and
understanding the constraints that this would create for the servicers,
it was agreed that a 60-70 day DAAR filing window with five additional
days for mail time was more appropriate and would not compromise the
original intent of the experiment. The servicing community has been very
responsive in complying with the requirement, with over 98% of DAARs now
submitted within the 60-70 DAAR filing window.

*Accelerated Information to Schools*

A total of ten institutions were selected to participate in a pilot
program designed to carry out specific delinquency intervention
strategies. The pilot is a demonstration outreach program aimed at
reducing loan delinquency among students who prematurely withdraw from
an institution of higher learning. To carry out the pilot, TG developed
specific strategies and tools to assist institutions in working with
students who recently departed from their campus and who borrowed under
the Federal Family Education Loan Program (FFELP). Pilot institutions
receive, at no cost to them, training services and assistance from TG.
Institutions work with the GA's Financial Aid Management Team to:

-   Establish methods for data exchange between TG and the institution
    (timely data exchange is necessary because the pilot targets
    students immediately after they have departed the campus -- well
    before they enter repayment);

-   Review the institution's policies and procedures for student
    withdrawals; and

-   Develop strategies and incentives to assist students to re-enroll at
    an institution.

The participating schools provide TG with borrower information regarding
students who withdraw or dropout sooner than their normal reporting to
NSLDS or the National Student Clearinghouse. This information flows to
the GA's pre-delinquency call center unit. The unit's counselors have
specific talking points related to encouraging the borrower to continue
his or her post-secondary education. In addition, TG makes an effort to
obtain from the borrower more specific information related to why he or
she could not continue their post-secondary education. This information
will be compiled and provided to the pilot institutions to incorporate
specific strategies. Pilot institutions were quite receptive about this
feature, because the data could assist them in validating their current
research or might result in the creation of new strategies for assisting
these students. Data obtained to date indicates that approximately 45%
of borrowers contacted have graduated, pre-registered for additional
classes, are still taking classes at the half time or below half time
level, or are enrolled at another institution. This suggests that there
may be opportunities for improvement in the enrollment reporting
process.

### Results -- Caveat

The delinquency cure rate has been impacted by a number of factors.
First, unlike collections, it takes nine months for an account to cycle
through the delinquency process. The success of default aversion
programs cannot be fully measured until a cohort of loans is followed
through the complete nine-month cycle to determine whether a claim has
been filed. Because the VFA was not signed until March 2001, it took a
number of months to make necessary system modifications and gain
industry partner buy-in. The first operational changes to default
aversion activities were not made until July 2001.

Additionally, there were temporary problems resulting from a large
servicer's migration to a new servicing center that impacted TG's cure
rate. TG was not initially alerted to the problems the servicer was
experiencing and was not able to react appropriately to the sudden
fluctuation in volume and performance. It took the center approximately
eight months before it was fully staffed with employees who were
proficient with the servicing system. During this time, TG saw its cure
rate decline as much as six percent. By April 2002, performance had
returned to normal rates.

Other factors that have impacted the delinquency and cure rate programs
are the increase in loan balances and worsening economic conditions.
Specifically, TG has identified that some servicers have provided up to
60 months or more of forbearance to prevent a borrower from defaulting.
As a result, the agency is finding it difficult to cure loans for these
borrowers as they have exhausted their forbearance and deferment
eligibility and are unable to pay. Because of the annual capping of
interest at the end of each forbearance period, some borrowers are faced
with balances that have increased substantially and, because of the
number of months of forbearance, are not conditioned to making a monthly
student loan payment. The loans in forbearance, however, represent less
than 20% of the loans in repayment in the TG portfolio and, of this,
only a portion represents those borrowers with 60 months of forbearance.

Another factor identified by TG relates to the use of consolidation.
Consolidation loans have larger balances as a result of interest capping
and spousal consolidations. TG has seen an increase in the number of
large balance consolidation loans (especially those in excess of \$100K)
becoming delinquent. These high-balance consolidation loans tend to be
more difficult to cure. In general, DAARs containing consolidation loans
have increased by over 8% over the last twelve months while other loan
types have declined or experienced very slight increases.

[^1]: Represents first full FY where all VFA agreements are in effect.

[^2]: Represents first full FY where all VFA agreements are in effect.

[^3]: For more specific information regarding GA collection recovery
    rates, please refer to the DCS website. See
    <http://www.collections.sfa.ed.gov/contractors/ga/stats/index.htm>.

[^4]: Represents first full FY where all VFA agreements are in effect.

[^5]: Represents a corrected amount that differs from the published
    information on the DCS website.

[^6]: CSAC data quality trend has continued to improve. The FY 2002
    snapshot as of September 30, 2002 does not reflect this upward
    trend.

[^7]: *Pending amendment to reduce fee rate range to 0.0425 to 0.102%.*

[^8]: This does not include repayment accounts and administrative wage
    garnishment recoveries.