E.D. Declines To Rescue Student-Loan Guarantor

By Mark Pitsch — August 01, 1990 2 min read

Washington--The Education Department will not intervene to rescue one of the nation’s largest student-loan guarantors from the brink of financial collapse.

The department’s general counsel, Edward Stringer, said at a news conference last week that should the Higher Education Assistance Foundation, of Overland Park, Kan., fail on its payments to banks, the foundation would no longer be a guarantor.

“When [heaf] can’t fulfill that responsibility, they’ll be terminated,” Mr. Stringer said.

The foundation, which reported losing $44 million last year, is in financial straits after guaranteeing $9.6 billion in loans. A spokesman for the firm said that at one time about half of the loans the foundation guaranteed went to “high-risk” students in trade schools. That figure is now down to about one-third, the spokesman added.

To ease the crunch, the foundation had sought approval from the department to merge with a much smaller Nebraska guarantor. But department officials balked at that idea.

Instead, Secretary of Education Lauro F. Cavazos has dispatched a nine-person department task force to monitor heaf operations in St. Paul, Minn. Two officials of the Office of Management and Budget also are making the trip.

“I will not, at this point, predict the when, why, and how’s of the resolution of those [financial] problems,” Mr. Cavazos said at the news conference. “That announcement will come at a later time, when the department has analyzed heaf’s situation and we have carefully examined other options available to the federal government in the event heaf does not survive.”

In a statement last week, heaf officials said they would cooperate fully with the department’s task force.

Student loans--more than $51 billion of which are outstanding nationwide--are issued by banks and backed by one of 55 guarantors, such as heaf, around the nation. If a student defaults on the loan, the guarantor pays the bank the loan amount and is reimbursed by the federal government.

But more than 5 percent of heaf’s guaranteed loans are in default, and under the rules of the student-loan program, the foundation is entitled to only 80 percent reimbursement from the government.

While looking to minimize costs to taxpayers, the task force will review the guarantor’s decisionmaking and glean information from heaf’s situation that will help make the student-loan program better, Mr. Cavazos said.

Despite fears that a heaf failure could disastrously affect the obtaining, making, and guaranteeing of student loans, Mr. Cavazos said the situation did not “threaten the integrity of the nationwide Guaranteed Student Loan program or the loans now guaranteed by heaf.”

But department officials said the government would not be required to reimburse banks if heaf or any other guarantor went under.

Senator Claiborne Pell, Democrat of Rhode Island and chairman of the Senate Education, Arts, and Humanities Subcommittee, called for the department to issue a “concrete proposal” to control defaults and crack down on irresponsible lenders.

A version of this article appeared in the August 01, 1990 edition of Education Week as E.D. Declines To Rescue Student-Loan Guarantor