Lessons from the Failure of a Student Loan Guarantor

By Cronin, Jospeh M. | Phi Delta Kappan, March 1993 | Go to article overview

Lessons from the Failure of a Student Loan Guarantor


Cronin, Jospeh M., Phi Delta Kappan


The student loan option remains a useful adjunct to federal grants, work/study programs, and cooperative education programs, Mr. Cronin points out. But excesses of enthusiasm for student loans in the 1980s created problems, from which he derives at least seven basic lessons.

WHAT CAN the higher education community learn from the financial troubles experienced by the Higher Education Assistance Foundation (HEAF) in the summer of 1990? During the 1980s the HEAF group was the largest and most aggressive of the not-for-profit student loan guaranty agencies. HEAF provided loan guarantees first for Minnesota and later for many other states whose legislatures were not inclined to create their own agencies to guarantee student loans, including Wyoming, Nebraska, Kansas, and West Virginia -- as well as the District of Columbia.

HEAF also reached out to any group that wanted guaranteed access to student loans, including the United Negro Colleges, the League of United Latin American Citizens, the Lutheran Brotherhood, a variety of law schools, and even the trade, technical, barber, and beauty schools that grew substantially in number during the 1980s. The size of HEAF's portfolio of guarantees grew until it reached 10%, then 15%, and finally more than 30% of what by 1987-88 had become a $10-billion-a-year federal student loan program.

What went wrong for HEAF? The federal government "reinsures" student loan guarantors according to the level of annual default rates on the loans they guarantee. Full federal reimbursement is paid only if a guarantor's default rate is under 5%. Only 90% is reimbursed for default rates in the 5% to 9% range, and only 80% for default rates higher than 9%. HEAF experienced several years of double-digit default rates. Several large national lenders specializing in making loans to students in career schools pursued the speedy HEAF guarantee service. Incredibly, one degree-granting college in Kansas, whose loans HEAF guaranteed, purchased a "correspondence" tractor-trailer driving school, in part to help balance the college budget. HEAF was also one of the three agencies that guaranteed loans for several California-based chains of career schools with high default rates whose loans were serviced by United Education Services (UES), an enterprise run by the trade school owners themselves.

Hearings conducted by Sen. Sam Nunn (D-Ga.), who chairs a U.S. Senate subcommittee on investigations, revealed a lack of diligent oversight of the loans guaranteed by HEAF and, ultimately, by the federal government. Fortunately, these 1990 hearings came in time to shape the debate on the 1991 or 1992 reauthorization of student aid and higher education programs. In November 1990, when Sallie Mae (Student Loan Marketing Association) assumed $9 billion of HEAF's responsibilities, a strong signal was sent to the Congress, to the Bush Administration, and to the higher education community that the time had come to make some crucial revisions in the programs that guarantee student loans.

Why couldn't HEAF correct the situation on its own? Testimony by HEAF's chairman before the Senate subcommittee indicated that he was not allowed to cut off lenders or schools with high default rates without following a cumbersome review process that might have been slowed still further by litigation in each case. Guarantors, as first-line insurers and as administrative agents, previously had more discretion in their business dealings. However, increasingly figid federal regulations and interpretations of federal policy had limited this discretion and so required HEAF to continue to guarantee risky loans.

Subsequently, Congress authorized the U.S. Department of Education and state guarantors to take emergency action to suspend those institutions that were not abiding by regulations governing federal loans. Furthermore, in the wake of savings-and-loan disasters and in the shadow of a growing federal deficit, no representative or senator wanted to extend the bailout option to student loan agencies. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Lessons from the Failure of a Student Loan Guarantor
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.