Have Student Loan Guaranty Agencies Lost Their Way?

Publication date: 
September, 2016
The Century Foundation

When the federal government stopped guaranteeing new bank-based student loans on June 30, 2010, it left behind a dozen or so nonprofit intermediaries, known as guaranty agencies, that had played administrative roles approving bank loans, reviewing colleges’ eligibility, and rehabilitating defaulted loans. Legally structured as nonprofits, these agencies are, at least in theory, committed to the public interest. But keeping them aligned with the needs of students and taxpayers has always been a challenge, and now that the Guaranteed Student Loan (GSL) program that they were designed to serve is in the rear-view mirror, what should happen with the endowments of more than $5 billion they have amassed?

If the $5 billion these agencies control had come from private donations, then we could perhaps leave it to the donors to actively press the agencies to put the money to good use. There are no donors, though. Most of the money came from federal coffers, or from fees charged to former students who defaulted on their student loans. Many of those defaults, it turns out, were the result of predatory colleges convincing students to enroll in programs that were of poor quality, failing to meet students’ needs and leading to debts rather than a degree or a job. Given the source of the money, an appropriate way to use it would be to repair the damage done by some participants in the federal student loan program and to prevent further hardship. For example, support is sorely needed, now, to provide counseling and legal aid to distressed borrowers. It is troubling that in the case of at least two of the largest agencies—ECMC and USA Funds—their direction seems to be almost the polar opposite.

This report looks at the rise and current limbo status of the legacy student loan guaranty agencies. It presents a brief history that covers the original role intended for them, as authorized in the Higher Education Act of 1965, as well as their tendency, from the earliest years, to abandon their public missions. It examines the current activities of two guaranty agencies that appear to be severely diverging from their missions, ECMC and USA Funds, and makes recommendations for putting their resources to better use.

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