As we all know, the rising levels of student debt have become an issue of concern across the nation. Loans make up the bulk of federal student aid, and with increasing tuition costs, students are borrowing record amounts. The question is whether students can repay this significant investment—or whether their debts are destined for delinquency and default that will overshadow their futures.

The Voluntary Flexible Agreements (VFA) were designed to address this exact issue. Created by Congress during the last reauthorization of the Higher Education Act in 1998, VFAs are individualized compacts between FFELP guarantors and the U.S. Department of Education (ED) that allow guarantors to develop new methods for debt management and default prevention. They also change the way guarantors are financed: Under the standard FFELP guaranty agency model, guarantors receive greater monetary compensation for collecting on defaulted loans than for preventing students from entering default. More than 60% of a standard FFELP guarantor’s revenues come from collecting defaulted student loans.

With VFAs, the guarantor financing model changes from one focused on default collection to proactive delinquency and default prevention. VFA guarantors receive financial rewards for meeting performance goals based on preventing delinquency and default altogether, using methods such as better borrower outreach, education, and counseling. In short, the VFAs encourage guarantors to prove their ability to affect the lives of borrowers and steer them onto a path of successful loan repayment.

Even better, the VFAs appear to be working. For instance, one VFA guarantor, American Student Assistance, reported a 2005 Cohort Default Rate of just 1.5%. This measure, which reflects student borrowers’ default rates, is the lowest among all 35 of the nation’s guarantors and well below the national average rate of 4.6%.

If you’re thinking this sounds too good to be true, you’re right. Just as the VFA guarantors have begun to report solid, consistent evidence that they can positively affect borrowers’ chances of default, the Department of Education (ED) has decided to pull the plug on all of the existing VFAs. If ED’s decision stands, as of January 2008, the VFA guarantors will have to return to the traditional guarantor financing model, which means payment for debt collection, not default prevention.

This is bad news for students and families. The decision to terminate is based on the belief that the VFA model costs the government more than the traditional guarantor model, as a result of the recent reduction in subsidies paid to guarantors contained in the College Cost Reduction and Access Act. But this assumption ignores the millions of dollars saved by having students successfully repay their federal loans—as well as the intangible value of these students’ healthy credit and future achievements.

Efforts are underway to stop the VFAs’ cancellation before it happens. Several members of Congress have been actively advocating for the survival of the VFAs, asking the Education Secretary to not move forward with termination. The MASFAA Executive Committee added its voice with a letter of support on November 6 (see below). Recently, Congress passed an amendment to the Labor-HHS-Education appropriations bill that prevents the Department from terminating VFAs and mandates the Department to re-negotiate all of the existing VFAs by December 31, 2008. However, the bill was vetoed by President Bush on November 13. While a veto override seems uncertain, there is a possibility that Congress will include the Labor-HHS-Education appropriations bill, including the VFA amendment, in an omnibus bill that combines spending appropriations for several federal programs

In another positive step, ED and ASA will have a preliminary discussion about the VFA in the coming weeks. The MASFAA Government Relations Committee hopes that ED reverses the decision to terminate. If the VFAs become a footnote in history, thousands of students and families will be left without the debt counseling and support these VFA guarantors provide. And that couldn’t come at a worse time.