Retaining the Right of the Secretary to Enter into
      Voluntary Flexible Agreements with Guarantors

Current Law:

The Secretary may enter into experimental Voluntary Flexible Agreements with guarantors which vary the traditional guarantor financing model to encourage default aversion and other activities.

Issue:

The Secretary entered into Voluntary Flexible Agreements with four guarantors: ASA, EdFund, Great Lakes and Texas.  Some of these agreements were not implemented until early in 2001.

The existing VFAs have shown significant promise in enhancing services to borrowers, schools, lenders and servicers and in preventing default.

Although provisions of the VFAs may later provide a model for the industry, the existing programs need additional time to mature.

Proposal:

That the current statutory language be maintained permitting the Secretary to negotiate Voluntary Flexible Agreements with guarantors.

Possible Objections:

Although the VFA guarantors believe that the default reductions will yield significant cost savings to the FFEL program, a report by the Solicitor General disputed the cost neutrality of some of the existing VFAs.

Counter Argument:

The cost savings from default aversion will more than offset the additional cost of the default aversion activities.  The Solicitor General report compared only the "fees" paid to the guarantors but did not factor in cost savings to ED from reduced claims as a result of increased default aversion activities.  Secretary Paige has cited the VFAs to Congress as important default reduction initiatives.