Getting to Know Guaranty Agencies: The Georgia Student Finance Commission

Last week, Higher Ed Watch announced the start of a series taking a closer look at individual federal student loan guaranty agencies. Today, we examine one such agency, the Georgia Student Finance Commission.

The designated guaranty agency for the state of Georgia is the Georgia Higher Education Assistance Corporation (GHEAC). Originally founded in 1965, GHEAC is one of the smaller guaranty agencies -- it guaranteed 72,125 new loans worth $254.6 million in the 2008 federal fiscal year, ranking it 27th out of the 35 guaranty agencies in new loans guaranteed and 29th for new loan volume.

Despite its size, GHEAC is well-connected within the state of Georgia, stemming from its close-knit relationship with a nonprofit student loan company, ties to the state government, and its administration of a popular merit-based grant program that benefits hundreds of thousands of students in the state each year. This setup creates opportunities for GHEAC to build goodwill and name recognition among Georgians, but also opens the door to potential conflicts of interest in some of its roles as a guaranty agency. These potential conflicts are certainly not unique to Georgia but are widespread among guarantors across the country that are closely linked to lenders or engage in lending themselves.

State Affiliation and Political Influence

GHEAC is a nonprofit public corporation that is considered part of the Georgia state government. Rather than serving as a standalone entity, it is a component unit of the Georgia Student Finance Commission (GSFC), which also administers the state's nonprofit loan company, the Georgia Student Finance Authority (GSFA).

From a governing standpoint, the Board of Commissioners for the GSFC (and hence the boards for the subsidiary lender and guaranty agency) is politically appointed by the governor and confirmed by the state senate. While the board is politically confirmed at the state level, its structure also reflects federal interests, as seats are apportioned such that each of Georgia's 13 U.S. Congressional districts gets a spot.

Being part of the state government gives GSFC clout when dealing with federal student loan issues. Any effort by the White House or Congress to rein in guarantors, or eliminate the role they play in the federal loan programs altogether, is likely to meet resistance from the governor and other state officials. The potential loss of state jobs is not likely to sit well in the statehouse or with Georgia's Congressional delegation.

In addition to its state connections, the GSFC also has some ties to the Georgia Association of Student Financial Aid Administrators (GASFAA). According to a 2007 filing with the Internal Revenue Service, GSFC's vice president for client services and marketing also serves as the legislative affairs chair for GASFAA. Having a role in this trade association gives GSFC another outlet to build connections with local colleges and universities -- a relationship that in other states has been used to lobby against proposals to end the FFEL program.

Ties to Lenders

GHEAC and the state's nonprofit lender GSFA are considered to be "companion agencies" within the Georgia Student Finance Commission because they are statutorily separate. In practice though, the three agencies act as a single company, sharing common boards of directors, mission statements, websites, and facilities. This lack of separation is also reflected both in the way the Department of Education lists GSFC as the designated guaranty agency for Georgia, and how the agency itself uses the name GSFC to refer to all of its operations, including the loan company and guaranty agency.

As a result of this setup, there is ostensibly no separation between the state's guaranty agency and a loan company. Though there is no legal requirement that a lender and guaranty agency not be housed within a single entity, it does raise questions about how the agency avoids the potential for conflicts of interest that arise as a result. For example, one role expected of agencies serving as designated guarantors for a state, such as GHEAC in Georgia, is to complete comprehensive audits of lenders. The rationale behind this policy is that the guaranty agency could serve as a third-party check against potential abuses in the program. In the case of GHEAC, however, there is no third-party separation between it and GSFA.

Second, guaranty agencies asking for federal advances to cover lender claim payments - a not unrealistic scenario given the likely uptick in student loan defaults coming from the weakened economy -- are expected to encourage "maximum commercial lender participation" in the FFEL program. But in the case of GHEAC, such actions work directly counter to the interests of GSFA, which, as a loan company, attempts to achieve as large a market share as possible.

These discussions about potential conflicts of interest are not meant to single out the GSFC. In fact, there's no evidence that anything being done in Georgia is any different from the connections between lenders and guaranty agencies in Pennsylvania, Kentucky, and a host of other states. But it does raise concerns about potential conflicts of interest in any location where lenders and guaranty agencies operate in a close-knit relationship.

Non-Federal Activities

In addition to its roles as a federal student loan guaranty agency and lender, the GSFC is perhaps best known for administering Georgia's HOPE Scholarship program. Funded via the state lottery, the HOPE scholarship is a merit-based grant that is awarded to roughly 200,000 students every year. In addition to the HOPE program, the GSFC also administers a few other scholarships for students that meet certain requirements, such as members of the military or residents who are attending a nearby public four-year college that is out of state. All told, GSFC disbursed 243,443 scholarships in the 2008 fiscal year.

On top of its scholarship activities, GSFC engaged in a number of other initiatives in 2008 that while not explicitly federally mandated, would serve to increase name recognition. These activities are targeted at students, parents, schools, and others, and include workshops, high school outreach events, and maintaining a website with information on preparing, applying, and paying for college.

Performance Measures

Though GHEAC administers very few loans relative to most other guaranty agencies, it does have one of the highest loan portfolio cohort default rates. In two of the last three years for which data is available, GHEAC had the highest default rate of any guaranty agency, with a rate of 9.8 percent for the 2004 cohort and 10.3 percent for the 2005 cohort.

Despite the relatively high default rate, GHEAC reported net income of $442,000 for the 2008 fiscal year. This is comparatively small relative to the 2007 and 2006 fiscal years, where it reported net income of $1.9 million and $3.7 million, respectively. The substantial drop in income for the 2008 fiscal year is a reflection of changes to guaranty agency compensation, which were implemented as part of the College Cost Reduction and Access Act of 2007.

The fact that GHEAC is still able to earn $6.0 million over three years despite a default rate of 9.4 percent indicates that there is little relationship between a guaranty agency's success at preventing student loan defaults and its bottom line. This is largely because the fees offered to guaranty agencies for preventing default -- 1 percent of the outstanding balance of a loan in danger of going into default -- pale in comparison to the 16 percent that they retain from defaulted loan collections.

The positive net income and high default rate also demonstrate the extent to which guaranty agencies have no risk-sharing with regard to defaults of loans in the FFEL program. They are required to pay lenders' claims for losses stemming from defaulted FFEL loans, but the actual payments are made using a pool of federal assets held in a custodial nature. In other words, the $5.5 million paid by the GHEAC to cover lenders' default insurance claims came entirely out of its pool of U.S. government assets -- not its own pockets.

Conclusion

The guaranty operations at the Georgia Student Finance Commission may be small relative to other agencies, but that does not mean that it is unusual or wildly different from other guarantors across the country. Its structure of having a guaranty agency all but inseparable from a lender is duplicated in Pennsylvania and several other states. Likewise, other agencies, such as the designated guarantor in New York also run popular (politically and from a public relations standpoint) grant programs. The questions raised here about the potential for conflicts of interest and ability to properly carry out its mission also are not necessarily specific to Georgia, but rather are germane to discussion of many guaranty agencies. And understanding the ways in which these guarantors interact with state, local, and federal agencies and constituents is crucial for appreciating how the debate over the Obama administration's proposal to eliminate the FFEL program will be shaped.

Check back next week when Higher Ed Watch's Getting to Know Guaranty Agency series will continue with another close look at a different type of federal student loan guaranty agency.

Correction: This post incorrectly referred to the New York State Higher Education Services Corporation as a guaranty agency that is connected to a lender. The intention was to describe the New York guaranty agency as one that also administered a popular grant program, but the two ideas were accidentally conflated. The post has been corrected and we regret the error.