What it means to be a student loan servicer: Guaranty Agency edition
By Mike Pierce | March 29, 2019
There has been a great deal of misinformation spread through state capitals about a special kind of private sector student loan company known as a “Guaranty Agency.” Industry lobbyists have tried to convince lawmakers that these companies are not performing “student loan servicing” under the definition commonly included in state legislative proposals—a definition modeled on federal regulations.
The truth: these are student loan servicers.
In fact, the second largest student loan servicer in the country, the Pennsylvania Higher Education Assistance Agency, also known as FedLoan Servicing, is a Guaranty Agency. Trellis, formerly known as Texas Guaranty, was a finalist for a government student loan servicing contract last year.
Why are these huge Guaranty Agencies qualified to be some of the largest student loan servicers in the country? Because student loan servicing is a core part of the Guaranty Agency business model. When these companies proactively contact borrowers and advise them about student loan repayment options, this is and should be considered “student loan servicing.” As the CFPB explained when it wrote the very first definition of “Student Loan Servicing” in 2013:
Some companies may perform specialized servicing functions, such as the default aversion services discussed below, but may not perform other servicing operations. The Bureau believes the companies’ activities should nonetheless be considered part of the identified market. Otherwise, servicers might divide their activities among different entities in an attempt to evade supervision.
What is a Guaranty Agency? A guaranty agency is best thought of as a combination insurance company, loan servicer, and debt collector. Back before 2010, Guaranty Agencies played a central role in the federal student loan system. When banks made loans to borrowers, Guaranty Agencies insured those loans so that banks and other private investors would get paid back if a borrower defaulted. When a loan defaulted, the Guaranty Agency would pay a claim by the bank or loan holder, and would then become the owner of the debt and seek to collect on it, acting as a first-party debt collector. In 2016, The Century Foundation published a great explainer on the structure and risks from these legacy companies.
What is “default aversion” and why is it student loan servicing? Guaranty Agencies play a central, if less visible role in the student loan servicing system. Because Guaranty Agencies have a big financial stake in avoiding default, the federal government created a program that allows these entities to contact borrowers before they default and advise them about their repayment options. When Guaranty Agencies do this work, known as “default aversion,” they are performing loan servicing. They have a financial stake in borrowers’ repayment success, they have direct contact with borrowers and they advise these borrowers about the terms and conditions of the debt they insure.
This is the same type of direct borrower interaction that, when performed improperly by other types of loan servicers, has led state attorneys general and the federal government to take more than a half a dozen enforcement actions against other student loan servicers in the past two years alone. PHEAA, a loan servicer and a Guaranty Agency, was the target of one such enforcement action by the Massachusetts Attorney General.
If student loan servicing is a small part of Guaranty Agencies’ work, what else are they doing now that there are no new federal loans to guaranty? When Congress ended the federally guaranteed student loan program (known as the Federal Family Education Loan Program or FFELP) back in 2010, there were nearly three dozen Guaranty Agencies and they insured more than a half a trillion dollars in student loans owed by more than 25 million Americans. Since that time, many of these entities have closed up shop, but others have searched for new revenue, jumping into other scandal-plagued sectors of higher education. For example:
- In 2014, Education Credit Management Corporation, known as ECMC, bought schools from the failing for-profit college giant Corinthian and then ran them into the ground. As chronicled in the press at the time, ECMC had no prior experience running a for-profit college and serious questions remained about why a large financial services firm was qualified to educate students. It turns out that three years after ECMC purchased 56 campuses from Corinthian, it closed all but three.
- For nine years, the biggest Guaranty Agencies gobbled up their smaller competitors. ECMC and Great Lakes Guaranty Agency have acquired their smaller peers and, over time, these entities have caused the market to concentrate. We don’t know how many loans each entity guarantees because the U.S. Department of Education has not released a report on these entities since 2016. But we do know that in a bid to keep revenue coming in, Guaranty Agencies have been accused of a wide range of abuses, including illegally charging fees to defaulted borrowers and racketeering.
This blog was long and I didn’t read the whole thing. What do I really need to know?
Guaranty Agencies are in the business of contacting borrowers and telling them about their repayment options. When this is done to prevent default and the Guaranty Agency has a stake in the loan, this is “student loan servicing” as we commonly think of it. In 2019, Guaranty Agencies insured or collected on nearly $200 billion in loans owed by nearly nine million borrowers nationwide, each of whom may be contacted by a Guaranty Agency one day.
But it’s not the only time these companies advise borrowers about repaying student debt. Guaranty Agencies also get paid by for-profit colleges and other schools to contact borrowers who are in distress.
When doing this work, they have come under fire from at least one federal watchdog.
In 2017, the Government Accountability Office issued a report finding widespread misinformation and potentially illegal conduct by companies that perform “Cohort Default Rate Management” for for-profit colleges and other schools. Guaranty Agencies like ECMC are some of the largest players in this industry. The bad practices described in this GAO report mirror the illegal student loan servicing practices identified by state attorneys general in a range of recent lawsuits.
And the services provided to these schools mirror the “default aversion” services industry lobbyists are seeking to hide from state oversight.
Mike is the Policy Director and Managing Counsel at the Student Borrower Protection Center. He is an attorney, advocate, and former senior regulator who joined SBPC after more than a decade fighting for student loan borrowers’ rights on Capitol Hill and at the Consumer Financial Protection Bureau.