Guaranty Agency Solvency

This briefing report provides information on the Department of Education's agreement to liquidate the Higher Education Assistance Foundation (HEAF), a national guarantor of student loans under the Stafford Student Loan Program. HEAF was experiencing serious financial difficulties and, in June 1990, announced that it might not be able to pay promptly all its lenders' student loan default claims--one of the main responsibilities of a guaranty agency. GAO discusses the federal costs incurred in fiscal year 1991 due to the Department's agreeing to this liquidation.

GAO found that: (1) prior to 1992, Education was not obligated to pay lenders' default claims if a guaranty agency became insolvent or failed to meet its obligations; (2) Education may provide federal advances to agencies needing immediate funds to continue uninterrupted payment of lenders' claims and has legal powers to preserve lenders' participation and student access to the Stafford Student Loan Program; (3) 1991 HEAF liquidation costs totalled $212.4 million, including 138.8 million in reinsurance default payments, $78.2 million in HEAF 1991 loan collection retentions, and $35.4 million in 1990 loan collection retentions, less $40 million in deductible HEAF assets; (4) the increase in reinsurance default payments was due to the liquidation agreement requiring Education to pay 100 percent reinsurance rather than limiting payments to 80 percent or 90 percent; and (5) net federal cost for liquidation will be lower in fiscal years 1992 and 1993, and loan collections will eventually exceed the government's cost for liquidating HEAF.