[Oasfaa] My Contribution to the Guarantor Question Discussion

[Mc Conahay, Pamela K.]

 FYI:  THIS IS ALL MY OWN PERSONAL OPINION.  
 
First, let me say up front that I think the entire Zero Fee feeding
frenzy that started in the last year is a blatant ploy by the big
players in the market to squeeze out the small ones.  Whatever it may be
gaining our students in the short run in cash flow, it will have an
impact on the structure of this industry for many years to come.   That
restructuring may be financially beneficial to the shareholders in some
corporations, but I don't think it is a good thing long term for our
students.    
 
As Mary Mowdy and Larry Hollingsworth clarified, unlike past years when
guarantors could "waive" the insurance fee if they could afford to
forego the revenue, the new "default aversion fee" (lovingly called the
"D" fee in the industry) is required to be deposited in the
federally-owned reserve fund.     
 
 I compare paying the D fee to tuition waivers used at the public
schools or tuition remission at a private school....waiving a fee isn't
"real money", but depositing money requires "real cash money" as my
grandfather called it.   I don't know about your personal budget, but in
my house, it's one thing to tighten my belt and another thing entirely
to carve some cash out of the monthly budget and go deposit it
somewhere.   If I suddenly told OU to cough up the $16+ million annual
tuition waiver budget in real cash money instead, there would be some
choking going on...and I'm not talking about winning basketball games by
1 point in the last few seconds.  I'm talking hara-kiri in the
Controllers office.   
 
This is separate from the origination fee ( the "O" fee).   When the O
fee is waived, the lender simply doesn't get paid as much from ED as
they would have....it gets deducted from the interest and special
allowance payments the lender gets.  Lenders don't have to produce cash
to pay the O fee.  
 
 How can guarantors afford to pay the fee?  Well, by collecting it from
somewhere else (getting the lender or servicer to pay it) or carving it
out of their own operating funds.  So, somebody somewhere has to pay
some real cash money for the "D" Fee.  Don't get me wrong,  I'd love it
every guarantor could afford to pay the D fee for their students and
every lender could afford to waive the O fee.  Unfortunately, I live in
the real world.
 
I wonder why Congress decided the D fee needed to be deposited into the
reserve fund?   To quote the NY HESC press release of 3/1/06, "This
ensures that the federal funds held by guarantors are sufficient to
cover the ongoing default-related costs of the program and support
essential services that avert defaults when borrowers become delinquent
on their loan payments."  Maybe somebody in Washington thinks all the
pressure to waive fees is causing guarantors to cut things a little too
close to the bone to be able to fulfill their role adequately?  
 
The BIG question is, what are we willing to lose (services, technology,
support)  that guarantors or lenders are currently providing in order to
divert their funds to pay the D or waive the O fee?  AND, if we switch
around to different guarantors every other year, what will that cost our
students in the long run?  Not just the 1% fee, I'm talking higher
default rates, servicing problems AND the degradation OUR services to
them will suffer if we're changing flows every year.  Not to mention the
impact on our state economy as billions of dollars in investments flows
out of state.  
 
To date, only the New York guarantor (HESC) has announced they will pay
the D fee for students.  I expect TG will announce as soon as it is
legal for them to do so.   BUT, FOR HOW LONG AND AT WHAT COST (monetary
and otherwise)?   You know, you can only gnaw off your own body parts
for so long before the body quits entirely........ 
 
OGSLP, USAF, NELA, and NSLP have announced they will begin charging
students the fee on July 1.   CSAC/EDFUND (California) announced today
they will begin charging the fee on October 1 (guarantors like EDFUND
that have Voluntary Flexible Agreements-VFAs are not required to start
charging the fee until Oct 1, the start of the federal fiscal year).
They did that out of consideration for us so we could plan accordingly
for our students, not to gain market share.   I applaud them for their
fortitude.  
Pam McConahay 
Assoc. Dir., Compliance, Training & Lender Relations 
University of Oklahoma Financial Aid Services 
1000 Asp Avenue, Room 216 Norman OK 73019-4078
(405) 325-4617  Fax (405) 325-7608 
pmcconahay at ou.edu 

(Note to Bill......governing boards really don't like it when you
publicly admit they are just a rubber stamp, they like to pretend they
are really in charge and that they're not colluding on a vote before the
official meeting.....but we're your friends so we won't tell anyone you
said that.)  

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