Summary: The relationship between the Department of Education and state-designated guaranty agencies that run the largest federal student loan program is changing in order to achieve program and cost efficiencies and improve delivery of student financial aid. These state or private not-for-profit agencies guarantee payment if students fail to repay loans obtained through the Federal Family Education Loan programs. The 1998 Amendments to the Higher Education Act authorize the Secretary of Education to enter into "voluntary flexible agreements" (VFA) with individual guaranty agencies. These agreements allow a guaranty agency to waive or modify some of the federal requirements that apply to other guaranty agencies. GAO found that the process for developing the agreements did not fully meet the needs of the guaranty agencies and other program participants. The process frustrated guaranty agency officials GAO talked to, especially those who ultimately chose not to apply for a VFA and those who were not granted a VFA. Agency officials said that Education's communication about the VFA development process was poor and that Education was unable to meet its own timetable. The VFAs generally complied with most of the legislative requirements. However, one of the four agreements does not conform to the requirement that projected federal program costs not increase due to the agreements. The key changes implemented under the VFAs include incentive pay structures for guaranty agencies and waivers of certain statutory and regulatory requirements. Each VFA contains provisions for paying the guaranty agency incentive amounts on the basis of specific performance measures, such as default rates. Education is not prepared to assess the effects of VFAs because it lacks a way to adequately measure changes in guaranty agency performance. The lack of uniform measures makes it difficult to distinguish the results of the VFAs from the effects of other factors, such as the general condition of the economy. Although the Department is required to report on the status of the VFA by September 2001, no reports have been issued so far.
