INSIDE HIGHER ED: Quiet Players, Deep Pockets

Career College Central Summary:

Student loan guarantee agencies faced an uncertain future in 2010, when the Obama administration and the U.S. Congress eliminated government-backed private lending. With the federal government issuing only direct loans, the guarantee business of insuring bank loans was destined to dry up.
As a result, the more than 30 guarantee agencies have been trying to diversify in recent years.
“A lot of guarantors are going through a strategic plan process,” said James P. Bergeron, president of the National Council of Higher Education Resources, a group that represents the agencies and other organizations involved in lending. “They have no choice but to look at their business models.”
Guarantors are required to be either nonprofits or state-run. The agencies were seen by some as being part of the problem with wasteful private lending, because they received federal fees from collecting on defaulted loans.
The pressure to find new revenue after the move to direct federal loans is a bit less extreme for state agencies, which can fall back on operating grant aid programs, tuition repayment plans or other state-based functions. But experts said large nonprofit guarantors, like USA Funds, Education Credit Management Corporation (ECMC), and the National Student Loan Program, will eventually need to reinvent themselves. Most have been doing so, gradually, for years.
That makes the recent move by ECMC to spend $24 million to buy 56 campuses from Corinthian Colleges, a failing for-profit chain, a little less surprising.
“Our industry is in a wind-down,” said David Hawn, president and CEO of the ECMC Group, an umbrella organization that runs a debt collection service and foundation as well as its guarantee arm.
However, guarantors do have some time to figure out next steps. As of last year, the guaranteed portfolio of outstanding loans from private lenders under the discontinued Federal Family Education Loan Program (FFELP) was $264 billion, according to the U.S. Department of Education. About $60 billion of that amount was in default.
“It’s going to take one to two decades for that to completely get paid off,” said Mark Kantrowitz, publisher of FinAid.org and an expert on financial aid.
Meanwhile, the agencies continue to earn revenue off the large pot of money. They get a standard fee of 1 percent of the balance of loans for insuring them against default, as well as fees for collection and account maintenance. A 2009 analysis by the New America Foundation found that guarantee agencies receive 16 cents on every dollar they collect in defaulted student loans.

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INSIDE HIGHER ED