To achieve FFEL program and cost efficiencies, and to improve the  availability and delivery of loans, the VFA legislation of 1998 authorized  VFAs between Education and the state-designated guaranty agencies. Guaranty agency officials were particularly  dissatisfied with Education’s lack of communication about the VFA  development process and its inability to meet its own timetable. Changes Offer Potential for Improved Performance

All four agreements contain provisions for incentive payments for  improved guaranty agency performance, and all four grant waivers to  certain statutory and regulatory requirements. The agreements went into effect without Education having  developed a clear way to measure changes in guaranty agency  performance. It is  likely to be difficult to distinguish the results of the VFAs from the effects  of other factors, such as the general condition of the economy, but without  uniform measures the task becomes even more difficult. The VFA legislation required that Education report on the status of the  VFAs, including a description of the standards by which each agency’s  performance under the agreement was assessed and the degree to which  each agency achieved the performance standards. The report was  due no later than September 30, 2001; however, as of this time, no report  has been issued. Conclusions

The VFA development process did not fully meet the needs of the guaranty  agencies or other program participants. We found that Education is not fully prepared to  evaluate the success of VFAs in part because it does not have adequate  standardized performance measures, such as delinquent loan cure rates. In order to ensure that all VFAs are in compliance with statutory  requirements, we recommend that the secretary of Education  renegotiate the Texas VFA as soon as practicable to obtain changes  necessary to ensure that the VFA does not increase projected federal  costs;  renegotiate the California VFA as soon as practicable to obtain changes  necessary to ensure that the VFA does not increase projected federal  costs, with or without changing the trigger default rate;  renegotiate the Great Lakes and American Student Assistance VFAs for  time periods after fiscal year 2003 to ensure that the VFAs do not  increase projected federal program costs; and  improve projections of the cost effects of renegotiated VFAs and any  future VFA proposals by (1) requiring that each VFA specify an  effective time period, (2) conducting a cost analysis covering that  period, and (3) conducting analyses to project the cost effects of  changes in assumptions regarding guaranty agency performance, such  as default rates, in making the cost projections. To determine the extent to which Education’s VFA development process  met the needs of guaranty agencies and other program participants, we  interviewed Education officials involved in the development of the VFAs,  officials at each of the nine guaranty agencies that submitted an  application for a VFA, and nine guaranty agencies that did not submit  applications. To determine the extent to which the VFAs complied with statutory  requirements we reviewed the VFA agreements, provisions of the Higher  Education Act (HEA) concerning the Federal Family Education Loan  Program (FFELP), and related regulations.
Why GAO Did This Study

The relationship between the Department of Education and state-designated guaranty agencies that run the largest federal student loan program is changing in order to achieve program and cost efficiencies and improve delivery of student financial aid. These state or private not-for-profit agencies guarantee payment if students fail to repay loans obtained through the Federal Family Education Loan programs. The 1998 Amendments to the Higher Education Act authorize the Secretary of Education to enter into "voluntary flexible agreements" (VFA) with individual guaranty agencies. These agreements allow a guaranty agency to waive or modify some of the federal requirements that apply to other guaranty agencies.

What GAO Found

GAO found that the process for developing the agreements did not fully meet the needs of the guaranty agencies and other program participants. The process frustrated guaranty agency officials GAO talked to, especially those who ultimately chose not to apply for a VFA and those who were not granted a VFA. Agency officials said that Education's communication about the VFA development process was poor and that Education was unable to meet its own timetable. The VFAs generally complied with most of the legislative requirements. However, one of the four agreements does not conform to the requirement that projected federal program costs not increase due to the agreements. The key changes implemented under the VFAs include incentive pay structures for guaranty agencies and waivers of certain statutory and regulatory requirements. Each VFA contains provisions for paying the guaranty agency incentive amounts on the basis of specific performance measures, such as default rates. Education is not prepared to assess the effects of VFAs because it lacks a way to adequately measure changes in guaranty agency performance. The lack of uniform measures makes it difficult to distinguish the results of the VFAs from the effects of other factors, such as the general condition of the economy. Although the Department is required to report on the status of the VFA by September 2001, no reports have been issued so far.