The Education Department announced Tuesday that it is searching for a firm to assume billions of dollars in student guaranteed loans currently held by a financially beleaguered institution.
Department officials confirmed at a press conference that the Higher Education Assistance Foundation, one of 55 nonprofit agencies that guarantee student loans given by banks and other lending institutions, is threatened by a high default rate. If the firm cannot pay off the defaulted loans, the government is obligated to make up the difference--a bill that could total more than $1 billion.
"Right now, we're looking at a range of alternatives whereby another entity or entities would perform each or all of (HEAF's) functions, either on a short-term or a long-term basis," Education Undersecretary Ted Sanders said. "Under this scenario . . . HEAF would not exist."
As a guarantee agency, HEAF pays lending institutions, such as banks, 100% of defaulted student loans. The Education Department then reimburses HEAF. But, if the default payments exceed 9% of the agency's insured loans, the agency is only reimbursed for 80% of the defaulted loan amount, according to departmental policy.
That extra cost to HEAF, one of the largest student loan guarantors, has put the agency in a financially crippling situation, although the precise dollar amount of the crisis is not known.
The department is aware of a few more agencies among the 55 in the country that may be experiencing financial trouble similar to HEAF's, "but none anywhere near the magnitude," Sanders said.
The department Tuesday sent a task force to review HEAF's loan portfolio at its headquarters in St. Paul, Minn. Meanwhile, Education Secretary Lauro F. Cavazos tried to allay fears that federal student loan programs are endangered.
"While HEAF's problems are serious to that organization, they do not threaten the integrity of the nationwide Guaranteed Student Loan Program or the loans now guaranteed by HEAF," Cavazos said in a statement.
But the department's general counsel, Ed Stringer, said there is a "concern that lenders as important parts of this program could decide to put their money elsewhere."
Officials of HEAF reported that the agency is cooperating with the department and is "pursuing additional options that would enable us to restore confidence to the guarantee." They added that the options involve sensitive negotiations, and thus "it would be premature and unconstructive to comment on them specifically."