EdFund, a branch of the California Student Aid Commission responsible for administering federal loan programs, announced that it would no longer be waiving a mandatory “guarantee fee” paid by students to loan guarantors, which pay for a borrower’s debt if he or she should default on a loan obligation.
The federally mandated change, which comes on the heels of a state audit of EdFund’s fiscal practices, is one of numerous federal loan policy alterations required by Congress’ recent passage of the Deficit Reduction Act of 2005.
Even though the law takes effect July 1, EdFund, which processes $7.8 billion in loans annually, has said that it will honor its commitment to borrowers not to charge the fee for all loans guaranteed on or before Sept. 30 of this year.
According to EdFund Director of Communications Allison Bradley Fleming, at UCSD the average Stafford loan is $4,400, meaning that the average borrower would pay a default guarantee fee of $44.
“About 71 percent of all borrowing at UCSD occurs between July 1 and Sept. 30 — the period during which we’ll be paying the fee on behalf of borrowers,” she stated in an e-mail. “If borrowing remains similar to previous years, EdFund will pay about $510,000 in default fees on behalf of UCSD borrowers during that time.”
Today borrowers can be charged a total of 4 percent in fees — a 1 percent fee to the guarantor and a 3 percent origination fee paid to the federal government.
The new law, however, reduces the origination fee for Stafford loan borrowers. The legislation first decreases the amount by 1 percent and then lowers it by an additional 0.5 percent each year until fees are eliminated in 2010, which will result in an eventual maximum fee of 1 percent compared to today’s amount.
UCSD Financial Aid Director Vincent De Anda stated in an e-mail that even with the new fee charges, the effect on students would be “minimal” and that EdFund’s decision to extend the waiver period through September would be helpful to borrowers.
“Only students who apply late, or come in after the first quarter, would have to pay the fee,” he stated.
UCSD students currently borrow about $65 million, according to De Anda, which means the fee would cost students about $650,000 extra each year.
EdFund, which is nine years old, had waived the fee for the past seven years because it had sizable budget surpluses used for covering the fee, according to EdFund Board of Directors Chairwoman Sally Furay.
However, because of the state budget crisis in 2004, EdFund’s coffers were depleted by $200 million so California would not have to reduce the amount of aid being disbursed through its Cal Grant programs. Because reserves were sucked dry and EdFund is required by federal law to have a minimum account set aside, the agency made the decision to no longer cover the fee, Furay said.
The decision comes after a state audit requested earlier this year by Assemblywoman Wilma Chan (D-Oakland) revealed questionable fiscal practices at the nonprofit loan management organization, including numerous breaches of policy and the failure to take minutes at closed-session board meetings.
Calls to Chan’s office were not returned.
Specifically, the audit says EdFund spent thousands on executive bonuses and parties, even while the loan program faced an $8.3 million operating deficit.
According to the audit, the program “may barely break even in federal fiscal year 2006.”
The results showed that the organization approved $187,500 in bonuses during the 2005 federal fiscal year and spent nearly $700,000 over the last five fiscal years on 14 receptions and conferences, including room and board at upscale hotels and resorts.
Furay said that EdFund, the second-largest loan agency in the country, welcomed the audit and that it accepted all 18 of the report’s recommendations during an April board meeting.
“The [state auditor] has a point,” Furay said. “No organization is perfect, and that’s what state auditors are for. EdFund’s policies have now been tightened.”
Furay, however, described the bonuses as “incentive compensation,” and said that EdFund is a performance-based organization. She also said that despite the results, students can still trust the loan agency.
In addition, she said that the organization would be working hard to resolve the problems identified in the report.
The audit, however, says that “the Legislature should require [CSAC] to dissolve EdFund and contract with another guarantee agency” if EdFund is unable to get its act together soon.
Readers can contact Matthew McArdle at [email protected].
