A New Approach to the Guarantor Finance Model
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Traditionally, federal student loan guarantors like American Student Assistance® (ASA) administer the federal insurance on student loans and receive federal funding for portfolio maintenance, default aversion, and recovery of defaulted student loans.
However, under the standard guarantor model, more than 60% of guarantor revenue comes from student loan default. So, guarantors receive more monetary compensation for defaulted loan collection than default prevention.
This means, if a guarantor carries out its public purpose mission of assisting assisting borrowers to successfully manage their higher education debt, the organization’s revenue streams actually suffer.
| The Paradox of the Guarantor Model | ||
|---|---|---|
| If the borrower: | Repays | Defaults |
| Borrower | Win | Loss |
| Lender | Win | Loss |
| Servicer | Win | Loss |
| Secondary Market | Win | Loss |
| School | Win | Loss |
| Department of Education | Win | Loss |
| Traditional Guarantor | No Benefit | Increased Revenue |
The current model is hardly in the best interest of borrowers, the federal government, taxpayers, or society as a whole. ASA® believes this is wrong. While we could increase our revenue by focusing on collecting defaulted loans, we remain committed to helping borrowers avoid default—because it is the right thing to do.
It is our belief that the funding convention for guarantors should be restructured to implement incentives that reward portfolio default prevention. This would allow guarantors to dedicate more resources to their public-purpose mission and better support borrowers’ rights.
