Voluntary Flexible Agreement
Encyclopedia
The Voluntary Flexible Agreement (VFA) was created by the United States Congress
in 1998 during a reauthorization of the Higher Education Act of 1965
. The VFA enables Federal Family Education Loan Program
(FFELP) guarantors to develop programs and techniques to help borrowers avoid student-loan default and all of its negative consequences. The VFA objective is experimentation for the purpose of finding the best practices, collecting long-term data, and sharing results in order to determine what benefits schools, students, the federal government, and the American taxpayer. [1]
The First Generation VFAs found that preventing delinquency is key in preventing default. Studies conducted by the First Generation VFAs found that educating students early and often about student loan repayment is an effective way to prevent late payments. Each guarantor invested in training programs to enhance its counselors’ telephone skills. Counselors became more familiar with default prevention goals and learned appropriate strategies for resolving underlying causes of borrower delinquency. Best practice found that the best time to intervene is during the six-month grace period after a student graduates, withdraws, or drops below half-time attendance in school.
re-establishing eligibility for federal student aid.
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
in 1998 during a reauthorization of the Higher Education Act of 1965
Higher Education Act of 1965
The Higher Education Act of 1965 was legislation signed into United States law on November 8, 1965, as part of President Lyndon Johnson's Great Society domestic agenda. Johnson chose Texas State University–San Marcos as the signing site...
. The VFA enables Federal Family Education Loan Program
Federal Family Education Loan Program
The Federal Family Education Loan Program was the second largest of the U.S. higher education loan programs . The FFEL was initiated by the Higher Education Act of 1965 and was funded through a public/private partnership administered at the state and local level...
(FFELP) guarantors to develop programs and techniques to help borrowers avoid student-loan default and all of its negative consequences. The VFA objective is experimentation for the purpose of finding the best practices, collecting long-term data, and sharing results in order to determine what benefits schools, students, the federal government, and the American taxpayer. [1]
New Methods
The VFA allows for the development of new methods for debt management and default prevention. Previously, the guarantor financing model was more focused on default collection. Approximately 60 percent of a loan guarantor’s revenue was generated from the collection of defaulted loans, with less than 10 percent coming from default prevention and zero percent coming from delinquency prevention. [1] Under the VFA, focus shifted to proactive delinquency, which means to stop repayment problems before they begin.“First Generation” VFAs
Originally, the government entered into a VFA with only four guarantors. The “first generation” VFA organizations are American Student Assistance (ASA), California Student Aid Commission/EDFUND, Great Lakes Higher Education Guaranty Corporation (Great Lakes) and Texas Guaranteed Student Loan Corporation (TG). Before the first VFA, the federal student loan program existed for nearly 40 years without any definitive data on what prevents delinquency and default. Since the approval of the first generation VFAs, the following has been realized:- reductions in cohort default rates of as much as 47 percent
- an average reduction in federal default “trigger” rates (an annual federal measurement representing the percentage of borrowers in repayment who default during that fiscal year) by as much as 24 %
- a conversion of defaulted loans to loans in good standing
- the creation of programs specifically focused on financial literacy and debt management education for students and their families [1]
The First Generation VFAs found that preventing delinquency is key in preventing default. Studies conducted by the First Generation VFAs found that educating students early and often about student loan repayment is an effective way to prevent late payments. Each guarantor invested in training programs to enhance its counselors’ telephone skills. Counselors became more familiar with default prevention goals and learned appropriate strategies for resolving underlying causes of borrower delinquency. Best practice found that the best time to intervene is during the six-month grace period after a student graduates, withdraws, or drops below half-time attendance in school.
Consequences of Defaulting on a Loan
After a loan has been in default for 270 days (meaning no payment has been made) and the loan agency is unable to collect the loan, the loan is turned over to the state’s guarantor. The loan may become “accelerated,” meaning the entire balance will be due in a single payment. The following steps may be taken in order to collect the loan. The United States Department of the Treasury may offset federal and/or state tax refunds. The Department may also require an employer to garnish 15% of disposable employee pay to be put toward repayment of the loan. Additional collection costs may be assessed. Legal action may be taken against the defaulted borrower. And finally, the credit bureau may be notified, resulting in a damaged credit rating. [2]Options for Defaulted Borrowers
Through the VFA proposal, borrowers who previously defaulted on their loans are able to enter a rehabilitation process and clean up their credit reports. [3] In the loan rehabilitation process, borrowers can reverse their delinquent status by making nine voluntary, on-time, consecutive payments. Borrowers can also get assistance inre-establishing eligibility for federal student aid.
See also
- suretySuretyA surety or guarantee, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults...
- American Student AssistanceAmerican Student AssistanceAmerican Student Assistance is a non-profit services and advocacy organization dedicated to helping students and families manage higher education debt. It is headquartered in downtown Boston, Massachusetts.- Name change :...
- Student Loan GuarantorStudent Loan GuarantorA guarantor is a person or agency that agrees to pay someone else’s debt should he or she default on a loan. In the case of student loans in the United States, the government guarantees the federal loans that students borrow...
- Cohort Default RateCohort Default RateA cohort default rate is the percentage of a school's borrowers who enter repayment on certain loans during a federal fiscal year and default prior to the end of the next one to two fiscal years...