Financial Problems in the Stafford Student Loan Program

Published by the Government Accountability Office on 1990-07-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Oface

For Release        Financial    Problems     in   the
on Delivery        Stafford    Student     Loan Program
Expected at
2:00 p.m. EDT
July   27, 1990

                   Statement  of
                   Franklin  Frazier, Director
                   Education  and Employment Issues
                   Human Resources Division

                   Before the
                   Committee on Banking,          Housing   and Urban Affairs
                   United States Senate

GAO/T-HRD-90-52                                                                 GAO Form 160 (12/87)
                              SUMMARY OF GAO TESTIMONY
                          ON THE FINANCIAL PROBLEMS IN THE
                            STAFFORD STUDENT LOAN PROGRAM
The Stafford        Student    Loan Program (formerly            called     the Guaranteed
Student      Loan Program) makes three kinds of student                     loans:    Stafford
Loans, Supplemental           Loans for Students          (SLS), and Parent Loans for
Undergraduate        Students     (PLUS).       Stafford     loans are low interest
 (currently       8 percent)    loans made on the basis of financial                    need:
the federal        government     pays interest         on the loan while         students     are
in school;        and students     generally       begin repayment        within     6 months
after     leaving     school.     SLS and PLUS loans are not based on
financial       need; interest       rates vary annually           (currently       11.49
percent):       both can provide        assistance       up to $20,000;        and repayment
generally       begins 60 days after          the loan is made.
In 1989, the Stafford             Student    Loan Pro&am made over 4 million
loans in the amount about $12 billion.                     The program accounts             for
about 61 percent         of student       aid provided       by the Department           of
Education.        Both public        and private      postsecondary         schools
participate       in the program.          Each loan is insured            by one of the 47
state     or nonprofit       guaranty     agencies     which administer           the program
and report      to the Department           of Education.         Guaranty       agencies     can
collect     an insurance         premium of up to 3 percent             for each loan: they
serve as lenders          of last resort        for students       unable to obtain           loans
through     other lenders;          and they reimburse         lenders      for 100 percent
of defaulted        claims     if the loans were properly             serviced.         The
Department      of Education         oversees     the program;      reinsures        the
guaranty     agencies       for 100 percent         of defaulted      loans,      except in
those cases where the agencies                 have high default          rates;     and makes
 interest    payments to lenders            for Stafford       loan borrowers          while they
are in school.
Between 1983 and 1989, loans grew from about $7 billion                         to over
$12 billion      annually--     an 83 percent      increase.     Similarly,       the
number of loans increased            56 percent      from 3 million        to 4.7
million.      During the same period,          defaults      increased       352 percent
from $444 million         to $2 billion.       In terms of program costs,
defaults    increased       from 10 percent      in 1983 to about 36 percent             in
Under normal circumstances                   lenders    that properly   originate      and
service    student       loans are guaranteed              100 percent  reimbursement      by
one of the 47 guaranty               agencies.         The Department   reinsures      the
guaranty     agencies       for 80 percent           to 100 percent    of loans depending
upon their      default       rates.         In the case that a guaranty          agency
encounters       financial       difficulty,         such as HEAF, who would honor the
guarantee      for the lender           becomes unclear.          The Department     has
authority      which it can use to guarantee                  loans held by lenders;
however,     they do not have an obligation                   to do so.
Mr.   Chairman    and Members of the        Committee:

I am pleased       to be here today to discuss           the Stafford    Student Loan
Program.       This program is of extreme importance              to students
seeking    a postsecondary          education    and to the future    work force of
our nation.        However,     in recent     years it has been the subject      of
greater     scrutiny     and much of that has focused on those
student-borrowers         who have defaulted        on their  loans,    and the
resulting      financial    liability       to the federal   government.

I will  focus my comments today on (1) how the Stafford            program
works,   (2) the growth in loans guaranteed         and defaulted,    and (3)
the concerns    surrounding  the financial      problems   being experienced
by the Higher Education     Assistance     Foundation    (HEAF).


The Department      of Education      offers      seven major student        financial
aid programs.       These programs were established              by title      IV of the
Higher Education       Act, as amended, and include             Pell grants,
Supplemental      Educational      Opportunity      Grants,    College    Work Study,
Perkins    loans,   Stafford     loans,    Parent Loans for Undergraduate
Students     (PLUS), and Supplemental            Loans for Students       (SLS).       For
fiscal    year 1990, the Department            estimates    that the seven programs
will   make almost $18 billion          of student       aid available     through      over
9.7 million      awards.      (See table     1.)

Table 1:    Estimated        Aid Available        and Number of Awards        for   the
Seven Maior Financial         Aid Proarams        (Fiscal Year 1990)
                                                    Number of
                            Aid   available          awards
Aid   nrooram               (in   millions)       (in thousands)
Pell grants                 $4,763.0                     3,214
Supplemental      grants        487.9                       678
Work study                      823.3                       876
Perkins   loans                 860 0                       804
Stafford    loans            8,769.0                     3,331
PLUS                            827.0                       258
SLS                          1,368.0                        545
Totals                      $17,898.2                     9,706
The Stafford        Student   Loan Program,        formerly     called     the Guaranteed
Student     Loan Program,       consists     of Stafford,       PLUS, and SLS loans.
These three kinds of loans will               represent       61 percent      of federal
student     aid made available         in fiscal      year 1990.       These loans are
guaranteed      by the federal        government      against    borrowers'      death,
disability,      bankruptcy,      and reinsured        to the guaranty         agency
against     default.       Banks, credit      unions,     and savings        and loan
associations         are the primary      providers      of student      loans.

The three       types of loans differ    somewhat         in their  terms and
conditions        and I would like  to highlight          some of these differences.

Stafford     Loans

Stafford   loans-- formerly      called      guaranteed   student    loans--are     the
largest  of the three loan types             (80 percent    of loans guaranteed        in
1990) and have been available             since the program was created          as
part of the Higher Education            Act of 1965.      The loans are based on
the student-borrower's        financial       needs, however,     borrowers     do not
have to demonstrate     their      credit     worthiness.     Other key facts       are:

       --Interest      rates  for new borrowers  are 8 percent              for the
           first    4 years of repayment   and 10 percent  after              that.
      --Maximum     loan limits   are $17,250 for undergraduates      and
         $54,750    for graduate   students.
      --Borrowers      generally  have a 6-month grace period    after
         leaving    school before    repayment begins.

PLUS Loans

These loans enable parents     to borrow funds for each dependent
student   (those who are not generally     responsible   for their   own
financial    support) enrolled   at a school.    These loans basically
started   in 1981 and are not needs-based.       Other key facts   are:

      --Interest      rates are variable     and are determined     once a year
          with a ceiling     of 11.49 percent,     which is the current    rate.
      --Maximum loan limits          for each dependent   are $4,000 per year
          to a total     of $20,000.
      --There    is normally     no grace period    and payment of principal
          and interest     must generally    begin within    60 days after   the
          loan is made.

SLS Loans

These loans are available            to independent      undergraduates       (those
students    generally     responsible      for their     own financial      support)     and
graduate    students.      These loans basically           started     in 1982l and
like    PLUS loans are not needs-based.             Also like       PLUS loans,     SLS
loans generally       have the same interest          rate,     borrowing   limits,     and
no grace period.        However, legislation          passed in December 1989
restricted     the availability         of SLS loans for such factors            as the
schoolts    borrower    default      rate and the lack of a high school
diploma    or a general       equivalency     degree.

lSLS were part of the Auxiliary            Loans to Assist   Students         program
prior  to 1986 and their  terms          and conditions   are similar,         and both
are reported  by the Department           as SLS loans.

The program involves       five parties:   students,    schools,   lenders,
guaranty   agencies,    and the Department     of Education.     I would like
to provide   some information      on each party,    using Stafford      loans as
a case example.      (We have attached    a chart that displays       the life
cycle of a Stafford      loan.)

The Student

The student       initiates      the loan process.              The student      provides
eligibility       information       to the school,           applies     to a lender      for the
loan after      the school approves           eligibility,           arranges     for repayment
with the lender,           and repays the loan.              Stafford      loan borrowers
receive     a federal       subsidy    throughout         the period       of their    loans,
including     a below market interest               rate,     and make no payments on the
loan while      they attend        school.      The student          repays the loan after
completing      or otherwise        leaving     school.         Between fiscal        year 1983
and 1989, the number of Stafford                  loans guaranteed            each year will
have increased          from about 3 million            to almost 4.7 million.

The School

The schools     verify     students'    eligibility      and the amount of
financial   aid needed.         There are about 8,000 schools             participating
in the Stafford        program.      The kinds of schools       participating          in
the program are categorized            by: 2-year public,       2-year private,
4-year public,       4-year private,        and proprietary     (for profit         trade
and vocational)        schools.
The Lender

Lenders make loans under the programs'                  guaranty     provisions,        and
must exercise       proper care in making,           servicing,       and collecting
them.     Lenders bill      the Department         each quarter       for the federal
interest     subsidy     payment for the loans they hold.                 These payments
include     (1) the students'        interest      while they are in school,             and
 (2) during      the life   of the loan, an interest             subsidy     that is
intended     to provide      lenders    with a near-market          rate of return.          If
borrowers      fail  to repay loans,         lenders    file    default    claims with the
guaranty     agency, but cannot be reimbursed                for their     claims until
borrowers      have been at least         180 days delinquent.            They also
receive     100 percent      reimbursement       if they have follow           required         .

There are over 12,000 lenders            participating       in the program.        As of
September      30, 1989, they held about $50 billion              in outstanding
loans.     Most of the loans are held by a small number of lenders.
For example,      25 lenders       had 54 percent      of the $50 billion
outstanding,      and one organization--         the federally      chartered    Student
Loan Marketing       Association--     had 27 percent       ($13.5 billion)      of the
total.       (See table   2.)

Table 2: Ten Larcest   Holders            in the    Stafford      Loan Proaram        (as
of September  30, 1989)
(Dollars  in millions)
Loan holder                                                    Amount   outstanding
Student    Loan Marketing     Association                         $13,483.3
Citibank    (New York)                                              2,104.2
California     Student   Loan Finance Corp.                         1,147.0
Nebraska Higher Education         Loan Program                      1,057.8
Chase Manhattan      Bank (New York)                                   954.7
Chemical    Bank (New York)                                            858.4
New England Education        Loan Mktg. Corp                           776.2
Penn. Higher Education        Assistance   Agency                      521.3
Marine Midland      Bank (New York)                                    503.1
Manufacturers      Hanover Trust Company                               456.3

The ultimate        risk to lenders       today is $50 billion      plus accrued
interest,       assuming that the $50 billion          in outstanding       Stafford
loans at the end of fiscal             year 1989 was not guaranteed          because
u      guaranty     agencies   were insolvent,       and the government        failed to
provide     a guarantee.        This maximum liability       also assumes that no
part of the $50 billion            in loans were repaid.        From a practical
point,     however,     the Department       said that borrowers      repay
approximately         89 percent     of the amounts due.

The Guaranty       Aqencv

The guaranty        agencies     carry out several             tasks,    including:       (1)
issuing     guarantees       on qualifying         loans,       and when borrowers         fail  to
repay their       loans due to death,            disability,         bankruptcy,      or default,
reimbursing       lenders     for their       claims;        (2) charging      students      an
insurance      premium of up to 3 percent                 of the loan;        (3) verifying
that lenders        properly      service     and attempt         to collect      loans before
the agency pays default              claims:      (4) collecting         the annual 1 percent
administrative         cost allowance         for the Department;             and (5)
collecting       on loans they retained              after      paying lenders       claims,
remitting      to the Department           its portion          of monies the agency
 subsequently       collect     from defaulted          borrowers.

If lenders    choose not to make loans to eligible                   students--for
example,   those attending           schools    with high default         rates--the
guaranty   agency must find another              lender      or become the "lender          of
last resort"     itself.         There are 47 guaranty          agencies--state
agencies   or private         nonprofit     organizations--that          report    to the
Department    of Education          on their    administration       of the program in
the 50 states,       District       of Columbia,      the Pacific      Islands,      Puerto
Rico, and the Virgin           Islands.

 The risks to the guaranty               agencies   relate    mostly       to the difference
 between what it receives              in reinsurance      from the        Department,    and
 what it    pays to lenders          for their default        claims.          The reinsurance
rate    (100/90/80      percent)     to guarantors      depends on the agencies
reaching      a certain     default    rate threshold        during    each fiscal     year.
For example,        if a guaranty      agency's     defaults      in a fiscal    year reach
5 percent      of loans in repayment           at the end of the previous           fiscal
year,    its reinsurance         rate would be 90 percent           for the remainder        of
the fiscal      year:    if its defaults        reach 9 percent        of loans in
repayment,      the reinsurance        rate decreases        to 80 percent.        The lower
reinsurance       rate remains       in effect     for the remainder        of the fiscal
year.      With the start        of the new fiscal        year, guaranty      agencies     are
again reimbursed         for 100 percent        of their     claim payments to lenders
until    they reach the default           rate thresholds.

The Denartment        of Education.

The Department         of Education       is responsible        for administering       the
Stafford      program and for overseeing               the activities      of the various
participants.          It pays lenders         interest    subsidies,      and reimburses
guaranty      agencies      for up to 100 percent          of lenders'      default    claims.
To partially        offset     program costs,        the Department       charges borrowers
a 5 percent       origination        fee.    It also receives         payments from the
guaranty      agencies      on collections        from reinsured       defaulted    loans.

The federal          government's       risk on defaulted            loans is, in general,
the amount of monies it pays in reinsurance,                            less any amounts it
receives       in the subsequent           collection        of defaulted       loans.        Its
risk     in a worst case scenario                could be 20 percent           of outstanding
loans.       This assumes that all loans outstanding--approximately                               $50
billion--defaulted             today,     and all guaranty           agencies     would be
insolvent.           From a practical         point,     however,       any expected        loss
would be much less.               The net default          rate for Stafford           loans is
about 11 percent;             most borrowers         repay their        loans.      In addition,
the Department            has said it historically              has repaid       reinsurance      at
approximately            a 95.5 percent        rate.      Also,    if guarantors         become
insolvent,         their     assets in any liquidation               could also be available
to offset        lenders'      defaulted       loan claims.          Therefore,       any expected
loss attributed            to all guarantors           becoming insolvent           would be much
less because not all outstanding                     Stafford      loans would default.


The Department         estimates    that in fiscal    year 1995, total loans
outstanding       will    be about $70 billion.       Now I would like to provide
a further      perspective       on the Stafford   program in terms of loan
growth,     defaults,       and program costs.

Loan Growth

The Stafford      program has grown during         the 198Os, especially        since
1983.    The amount of new loans guaranteed2            through   fiscal     year 1989
for the entire       program increased      83 percent    since 1983.       Not
unexpectedly,      because PLUS and SLS loans were basically              just
starting    during    this period,    their    growth rates were high--407
percent    and 1,832 percent,      respectively.       (See table     3.)

Table 3: Loan Volume       Has Substantiallv      Increased    Since       Fiscal
Year 1983                                                              .
(Dollars  in millions)
                                     Loans auaranteed
                               Fiscal   year    Fiscal  year       Percent
Tvne of      loan                  1983            1989            increase
Stafford                          $6,537          $9,593               47
PLUS                                  147             746             407
SLS                                   110          2,125           1,832
Total      program                $6,794         $12,464                   83

2Loans guaranteed   represent    commitments     made to lenders  by
guaranty  agencies.    However,   actual   loan   disbursements  would   be
less in those instances     where students      decide not to enroll   in
school and the loan was cancelled.
Default      Growth

Defaults    have risen     dramatically.         Defaults for the total          program
increased     352 percent     in the last     6 years.    Stafford       loan defaults
went up 278 percent       from fiscal      year 1983 through      fiscal     year 1989,
while    PLUS and SLS loan increases            were 6,525 percent          and 112,730
percent,    respectively.       (See table    4.)

Table 4: Defaults    Have Dramaticallv              Increased   Since   Fiscal
Year 1983
(Dollars  in thousands)

                                  l       Default     payments to lenders
                                       Fiscal            Fiscal       Percent
Tvne of      loan                     year 1983         year 1989     increase
Stafford                              $444,022          $1,679,000          278
PLUS                                        483              32,000           a
SLS                                         265             299,000           a

Total      program                    $444,770          $2,010,000          352

aDefault   rates for PLUS and SLS loans increased             6,525 percent   and
112,730 percent,     respectively,       over the 6-year period.       However,
these loans were relatively           new and the eligibility      for SLS loans
had been liberalized      in the last 3 years.         By all indications,
default  rates are rising        rapidly    for those two types of loans.

Although      both loan volume and loan defaults             have increased
dramatically       over the last 6 years,         the increase       in defaults      has
far exceeded the increase           in loan volume.         For example,      as I pointed
out earlier,       total    loans increased     83 percent       from fiscal      year 1983
through      1989, while defaults       increased    352 percent--four          times
faster    than loan volume.         The Department      attributes      a large portion
of these default         increases    to the four-fold        increase    in Stafford
loans from 1977 to 1983.
proaram              Costs

As a portion      of total     program costs,     default   costs3 have risen     from
about 10 percent        in fiscal     year 1980 to 36 percent       in 1989.
Interest     subsidies     have decreased      as a portion    of total   costs, and
were about 60 percent          of the program's      costs in 1989.      Other costs,
including     the Department's        expenses for other claims,        such as death
and disability,        have leveled      off to 4 percent    of program costs in
1989.     (See figure      1.)

Fiaure               1:     Defaults               Are Becominq             A Greater      Portion      of PrOCfram Costs

100       PorantofPmgramCabtr



  0                                                        ..-_-, . _

  1960           1981        1982       1963        1984         lW!5     1986     1987   1988   1989
  Rso81     Yw

          -          Interest aubaidies
          -1--       All orhercoan
          D          Default peymenn to agencies

 3The default                       costs      represent                payments      to guaranty       agencies.

I would now like      to focus on the problems     currently      faced by HEAF.
I want to first      compare HEAF's loan and default         volume with other
guaranty   agencies.       Then, Mr. Chairman,   I shall     address the three
areas about HEAF that the Committee         is most interested        in: (1) what
is the risk     faced by lenders    who hold loans guaranteed         by HEAF? (2)
what is the risk       faced by the Student    Loan Marketing       Association
 (Sallie  Mae)? and (3) what costs may be incurred            by the federal
government    if HEAF becomes insolvent?

HEAF's   Loan Volume

While most guaranty      agencies   generally       serve only one state,       HEAF
and United   Student    Aid Funds, Inc.       (USAF), are national        guarantors
and have been designated        by several     states    to serve as their
guarantor.    As a result,      HEAF is the designated          guarantor    for the
District   of Columbia,    Kansas, Minnesota,          Nebraska4,    West Virginia,
and Wyoming.

In recent     years HEAF has been the largest          guarantor     in the Stafford
program.      However, as shown in table        5, HEAF's share of loans began
to decline     in fiscal     year 1989, from over 20 percent           in each of the
previous     3 years,    to 14.4 percent     in fiscal   year 1989.       In
addition,     HEAF's share of new loans guaranteed            continued     to decline
so far this year,        representing    12.2 percent    of all loans guaranteed
during    the first    6 months of fiscal      year 1990.

HEAF attributed        its decline    in new loan guarantees      to its decision
in July 1988 to cease guaranteeing            loans in 18 states     because its
loan portfolio       mix that year was mostly        (70 percent)   for students
attending     proprietary    schools.     Default   rates on loans made to these

4The state  of Nebraska has designated           two guarantors,      HEAF and
the Nebraska Student   Loan Program.
students    are much higher     than are default    rates for students
attending    4-year    schools.    HEAF said that the change made in                         1988
reduced its 1989 portfolio         of loans to borrowers    attending
proprietary     schools    to 35 percent,   down from 70 percent.

Table 5:  HEAF Has Had the             Larsest        Share    of     Loan Dollars      Guaranteed
(Numbers are percentages)
                                                Fiscal        year
Asencv                      1986             1987                    1988        1989
HEAF                        21.9             27.6                    26.9        14.4
USAF                         6.4              8.4                    10.3        12.8
California                   7.9              7.7                     8.0         9.6
New York                     9.6              8.3                     7.9         7.9
Pennsylvania                 5.7              6.2                     6.8         8.1

Source:     Department        of Education

HEAFls    Default     Volume

As the largest          guarantor    of student     loans,     HEAF is also the biggest
payer of default          claims   to lenders.        During the last 4 fiscal
years,      HEAF's share of default          claims    paid to lenders        has increased
significantly         from 12.0 percent        in 1986 to 38.7 percent           in 1989.
Table 6 shows that HEAF's share of default                     claims    is much higher
compared to the four agencies               guaranteeing       the next largest       numbers
of Stafford        loans.      In contrast,      Pennsylvania's       default   share
steadily      declined      during   the period.

Table 6: HEAF Has Had the              Laraest        Share    of Default       Dollars
(Numbers are percentages)
                                                 Fiscal       year
Aaencv                      1986              1987                   1988        1989
HEAF                        12.0              24.9                   35.0        38.7
USAF                         5.4               5.3                    5.6         7.0
California                  12.7               8.9                    6.8         8.9
New York                    15.1              11.7                    9.4         9.8
Pennsylvania                 6.7               4.8                    3.7         2.6

Source:        Department      of Education

Figure    2 shows that HEAF's share of default   claims paid to lenders
increased    as its loan volume remained  steady and subsequently

Fisure  2: HEAF's                   Share of Total   Stafford   Prosram      Defaults   Now
Exceeds Its Share                   of Loan Volume


 1986                              1997              1988                 1999
  Fiscal Year

        -         Loan Volume
        - - - -   Delaults

 sauroe: Depaltment of Educalion

Risk   to   Lenders      with   HEAF-Guaranteed       Loans

Under normal circumstances,           lenders       are reimbursed       100 percent      for
default    claims    if they properly        originate      and service      their    student
loans.     As a result,     lenders     with HEAF-guaranteed           loans are paid the
full    amount of their     defaulted      loans if they followed            established
procedures.        HEAF told us that as of July 17, 1990, it had $8.8
billion     in outstanding     guaranteed        loans.     Therefore,     if HEAF ceased
operations      that day, that amount --and any accrued interest--would                       be
the maximum risk        for these lenders          on their    loan portfolios        if
borrowers      stopped making or never made any payments.                    This also
assumes that the government        would pay no reinsurance         on lenders'
default   claims.      Of course in a liquidation,          HEAF's assets could be
available    to help offset    lenders   default    claims.     HEAF also reports
that 10 lenders     held about 75 percent        of its outstanding      loans as of
July 17, 1990.

Risk   to   Sallie      Mae

As I stated          earlier,    lenders      have some risk    in the Stafford      program
if they fail           to follow      proper procedures      in originating    and
servicing    a       loan.     Sallie      Mae's risk would be no different        than
other holders            of student      loans.    HEAF reports    that Sallie   Mae has
the largest          share of HEAF-guaranteed          loans,   almost $2.9 billion        as
of July 17,          1990.

Risk    to the       Federal    Government

 If HEAF should fail     and is unable to meet its commitments                to pay
 lenders   for defaulted    guaranteed     loans,   the question       becomes:     is
 the payment of lenders'       default   claims    a responsibility         of the
 federal   government?      Under the Higher Education            Act, as amended,
 the Department     of Education     has no direct     legal   obligation       to
 lenders   if a guaranty    agency, such as HEAF, becomes insolvent                or
 otherwise    fails  to meet its obligations.          The contract       the
Department     entered   into with the guaranty       agency does not extend to
the lender--the       Department     is not insuring   lenders.   Therefore,    the
Department    has no legal       responsibility    to pay lenders  claims    if HEAF
should fail.

However, the Secretary         of Education    has broad legal    powers in
connection    with the Stafford        Student  Loan Program which may be used
in such cases.      Although      not required   or obligated   by the law to
take any particular       action,    the Department    could assert    that it has
the authority     to pay lenders'       claims  on defaulted   student    loans.

Mr. Chairman, that concludes my statement.     My colleagues  and I
would be happy to answer any questions    you or other Committee
members may have.


Life of a Stafford Loan

                                                              Lender makes loan to
                                                              eslglble student after
                                                             approval from guaranty

                   School reports student’s                      Lender servrces                           Dept of Educarlon pays
                       status to lender                                loan            v                   interest subsidv on loan

                                                             Student frntshes school
                                                              and lender schedules
                             ,                                   repayment plan

                                    Student makes                                                  Student does not
                                    loan payments                                                      make loan

                                                                                                    Lender trres to
                                                                                                     collect from
                                                                                                                 Payments    not reestablrshed
                                                                                                 Guaranty agency pays
                                                                                               lender and tries to collect
                                                                                                     from studenta
                                                                                                                 Payments    not reestablrshed
                                                                                                  Dept of Education
                                                                                                pays guaranty agency0

                                                                                           ,    Loan may )W;;l;en;           ;    reestablished

                                      Loan IS repatd
                             I                           I

   ‘Guaranty agency pays 100 percent of the lender’s clarm, If the loan was serviced oroperly.
  -the Deot of Education pays relnsurance to the guaranty agency, up to 100 percent of the claim
    rhe Dept of Eaucatlon may refer defaulted  loan to IRS for Income tax refund offset