The Chronicle of Higher Education's Paul Basken reported last week on a leaked document which spells out the contractual relationship between Sallie Mae, the nation's largest student loan company, and USA Funds, the nation's largest loan guarantee agency. On the surface, a contractual relationship sounds pretty boring, but considering that guarantee agencies are responsible for overseeing lenders in the federal loan program, this type of relationship poses some serious conflict-of-interest problems.
Guarantee agencies must be non-profit or state-based entities, and, in addition to being the primary insurer of federal loans, they are responsible for ensuring lenders perform due-diligence on loans before filing a claim for repayment on a defaulted loan. This helps to protect against fraud in the federal loan program by ensuring lenders don't file false default reimbursement claims.
Because of their oversight responsibilities, guarantee agencies are supposed to maintain an arms-length relationship with lenders. When Sallie Mae purchased USA Group, of which USA Funds was one part, it could not, as a for-profit company, also acquire USA Funds. Instead, USA Funds remained a separate entity, but Sallie Mae contracted with the company to provide guarantee services on all of its loans. And a good chunk of Sallie Mae's fee-based revenues come from this arrangement.
Both the GAO and Inspector General have issued reports advising against this type of close-knit relationship between guarantee agencies and lenders, but in 2004 the Department of Education overruled the Inspector General's recommendation that USA Funds and Sallie Mae end their relationship. Perhaps leaks like this will spur the Department of Education to re-think its position.
For more information on the history of Sallie Mae and its relationship with USA Funds, check our report from last year here.
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