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FOR RELEASE Contact: Stephanie Babyak March 17, 1994 (202) 401-2311 U.S. Secretary of Education Richard W. Riley today received a $300 million check from a once-failed student loan guaranty agency, the Higher Education Assistance Foundation (HEAF). The payment marks the conclusion of HEAF's managed winddown.
"The winddown was the result of a highly effective public- private partnership, with a new HEAF organization, the Education Department and Sallie Mae [Student Loan Marketing Association], producing results beyond our highest expectations," Riley said. "I want to personally thank all those involved in making this venture such a success."
"The HEAF winddown is a positive indicator of good department management, and shows we can make a smooth transition to direct lending without limiting loan access to students," added Madeleine Kunin, deputy secretary of education.
When HEAF became insolvent in 1990, the department estimated the winddown would increase ordinary student loan program costs by $26 million; other estimates ranged to as much as $200 million.
The check, presented by HEAF's current board chairman Robert A. Stein, who is also dean of the University of Minnesota Law School, reimburses the department for financial concessions made to HEAF to finance the winddown. The $300 million is double the department's original projections of HEAF's assets at close-out.
The net effect of the winddown depends on future collections of defaulted loans returned to the department. If the department is able to match its historical collection performance rate over the next six years, the net result of the winddown will reduce ordinary program costs by approximately $70 million.
At the time of its insolvency HEAF was the nation's largest guarantor of federally subsidized student loans, providing services to more than 2,100 banks and 7,000 schools nationwide. The company, based in St. Paul, Minn., held some $9.3 billion in outstanding student loan guarantees and was directly responsible for collecting $4.2 billion in defaulted loans.
Guaranty agencies insure loans made to students, pay claims to lenders on defaulted loans, and service and attempt to collect defaulted loans. HEAF's failure was largely attributed to building a portfolio that contained too many high-risk, proprietary school loans. By law, the department does not fully reimburse a guaranty agency if the percentage of defaulted loans in an agency's portfolio exceeds five percent.
In response to the failure, the department entered into an agreement with Sallie Mae to manage the winddown and liquidation, which included distributing HEAF's guarantee loan portfolio to other guaranty agencies.
Riley said the successful turnaround can be attributed to a new HEAF board, appointed by the department and Sallie Mae, which secured a highly favorable settlement of conflicting claims with prior HEAF management, and to aggressive collection of defaulted loans.
"HEAF's winddown averted serious disruption to the student loan programs and achieved all of its objectives," Riley said. "In the process, we learned some valuable lessons that form the foundation for a comprehensive strategy to deal with similar issues that may arise in the transition to direct lending."
The federal government, rather than private lenders, will begin making loans directly to students through schools on July 1. This year, direct loans will represent five percent of loan volume, increasing to at least 60 percent by academic year 1998-99.
Guaranty agencies and lenders will continue to play a significant role in the Federal Family Education Loan Program (FFELP). However, with the transition to direct lending, as well as changes brought about with passage of the Student Loan Reform Act of 1993, some agencies are likely to see reductions in volume and profit, causing them to leave the business. Puerto Rico's guaranty agency has already dissolved, and the department arranged for another agency to assume its responsibilities.
To ensure loan access under the FFELP and a smooth transition to direct lending, the secretary is entering into an agreement with a new, private non-profit agency that can perform guaranty agency functions as a last resort, service outstanding portfolios, and provide new guarantees. Individuals on HEAF's current board of directors created the new transitional guaranty agency and applied for recognition.
In response to the failure, the department entered into an agreement with Sallie Mae to assume responsibilities as a "lender of last resort."
"Our goal is to protect the interests of students and taxpayers. With the creation of this new agency and the signing of the Sallie Mae agreement, the department can ensure that every eligible student will continue to have access to loans," Riley said. "This management strategy will help us achieve that objective with a minimum of disruption and cost."