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USA Group: the giant in education loans doesn't behave like a not-for-profit.

USA Group

The giant in education loans doesn't behave like a not-for-profit.

Most commuters traveling on Interstate 69 northeast of Indianapolis through Fishers probably don't know that USA Group Inc. is the nation's largest guarantor of student loans, that it employs almost 1,600 people or that it had gross revenues of about $106 million last year.

But they certainly aren't going to have any trouble finding the place.

That's because the education-finance firm has just opened up a $36 million headquarters at 161st Street and I-69. The new complex has a dining room, an exercise facility, an adjacent day-care center and more square feet (401,598) than the Indiana Convention Center and Hoosier Dome. And it still isn't big enough for all the company's employees; some remain at the old Castleton-area headquarters.

It wasn't built overnight. Neither was the company behind it, though as Chairman and CEO Roy A. Nicholson readily admits, USA Group is one of Indiana's quieter business success stories. "To some degree, that's our fault," he says, "because we haven't been really oriented to making ourselves better known. Unlike the banks and insurance companies, we don't sell anything locally. Our marketplace is credit business. We don't put up billboards and say, |Come here, John and Susie Student, and get your loans."

The guaranteed student loans John and Susie Student receive, however, stand a good chance of having a connection with a USA Group company. United Student Aid Funds Inc. is the designated guarantor for the student loan programs of six states and certain U.S. territories in the Pacific. Education Loan Servicing Center Inc. services the processing needs of guaranteed student loan programs in another five states. And USA Group provides full-service management for the state-guaranteed student loan programs of four states, including Indiana, and the Virgin Islands.

In short, one in four student loans made in the United States this year will be either guaranteed or processed by companies in the USA Group, according to Nelson S. Scharadin Jr., vice president for corporate communications of USA Funds.

Scharadin points out that many of the concerns felt by parents today are similar to those that sparked the company's founding and the concept of guaranteed student loans back in 1960. Back then, rising costs were making it harder and harder for families to afford to send their children to college, and there were no broad-based federal financial-aid programs.

A group of businessmen--including Hoosiers John Burkhart, John L. Dupree, J. Hugh Funk and E.B. Newhill--got together to try to find a solution. They believed that private enterprise should attempt to solve society's ills before the federal government gives it a shot, says Scharadin. "That was sort of their overriding philosophy, that if there was an identifiable societal problem, it ought to be private industry that organizes to find a solution, so that the government doesn't get involved, because when government gets involved, they muck it up."

The main problem the businessmen saw was that there was no way for families to finance the cost of a college education. The money was there, but banks understandably shied away from loans to students who had no credit history and no collateral, just potential. "Because several of these men had insurance backgrounds, they conceived what is fundamentally an insurance solution to the problem," says Scharadin. Providing guarantees to private lending companies, they theorized, would induce them to make loans to students.

Quickly, USA Funds put the concept to work. The company went around to various states encouraging private businesses to form insurance reserves for student loans. After the initial pool was formed, guarantee fees paid by students when they took out loans, like insurance premiums, helped fund the program. If a student defaulted on a loan, the insurance money helped buy the loan from the lender, thereby guaranteeing that the lender would get back 100 percent of its money. USA Funds played the role of coordinator, establishing procedures and forms.

The idea worked so well that the federal government took notice. And in 1965, President Johnson included funding for a federal Guaranteed Student Loan program in the Higher Education Act.

That act, however, completely changed the rules of the game. The federal government gave states the option of managing their own guaranteed student loan programs, having the federal government do it, or having USA Funds do it. "Then," says Scharadin, "United Student Aid Funds got out of the fund-raising business and into the loan-management business."

Unfortunately for USA Funds, the federal government charged a lower guarantee premium on student loans, and growth leveled off. But another factor soon came into play: The federal government couldn't live up to its processing promises. When lenders began tiring of the red tape and poor service and started to drop out, pressure mounted for the government to change the program.

The result was the 1976 amendment to the Higher Education Act, which provided incentives for private not-for-profit organizations and state agencies to enter the loan guarantee field. It also gave individual states the right to choose how to run their programs. Under the terms of the act, a state either could have state employees manage its program, possibly with the help of a service firm, or it could contract the task out.

"That was a win-win situation for us," says Scharadin. If a state opted to do nothing, USA Funds could sell bankers on a guaranteed student loan program that was already in place. If, on the other hand, a state decided to develop its own program, USA Group was available to be the service bureau.

For the next several years, USA Funds focused on contract services. The company worked on strengthening its service bureaus and building a stronger network of support services, including its computer network. By the early '80s, the competition was catching up--fast.

Enter Nicholson, who was hired as president of USA Funds in 1984 after three years as the executive director of the Indiana Secondary Market for Education Loans Inc. "What we were presented with here in 1984 was a kind of turnaround opportunity, because USA Funds was on the decline at the time," says Nicholson. "The competition had knocked some of the wind out of our sails, and things looked kind of bad for the company."

Nicholson made it clear when he interviewed for the position that he planned to make changes. One of the first things he went to work on was the corporation's self-image. "We're a different kind of company, because we're a not-for-profit that thinks of itself as a business," explains Nicholson. Before he came aboard, Nicholson says the company was so hung up on its not-for-profit status that it failed to regard itself as a regular business in areas such as marketing and customer service. "As far as I'm concerned," Nicholson says, "our not-for-profit status is simply a question of the tax laws. It has nothing to do with the way we conduct our affairs."

With that kind of viewpoint at the top, USA Funds went on the attack. It began to market its own loan guarantee aggressively, something the company hadn't been doing. Then, it shortened the loan-processing time by combining the application and the promissory note the borrower had to sign. The following year, 1985, USA Funds virtually eliminated the paperwork with a software product called WhizKid.

With WhizKid, schools and lenders could file the guaranteed loan applications electronically. WhizKid also allowed USA Funds to offer banks automatic processing. By entering criteria that the banks in the network used to accept student loans and analyzing the applications that came in, USA Funds could assign them to the banks automatically.

When the company addressed the turnaround need in 1984, it decided that harnessing technology was the key to success. "In the volumes that we deal with, in the numbers that we talk about, you have to optimize your use of technology, particularly in computers and computerization," says Nicholson.

WhizKid completely reshaped the way the company conducted business. Whereas the lead time for processing a student loan used to be weeks, if not months, with WhizKid, USA Funds could shorten it down to a matter of days. It also could reduce errors and minimize work for the student financial aid officer.

The company has continued to upgrade WhizKid over the years while introducing other technical innovations to the education-finance industry. It also has diversified.

Today, USA Funds is one of five companies in the nation under contract with the federal government to do financial need analyses for prospective participants in the guaranteed student loan program, a market Nicholson sees as a real growth opportunity. Two years ago, with the help of a $40 million line of credit, the company entered the secondary marketplace, not as a buyer, as is usually the case, but as a broker. In the past 18 months, USA Group has bought and sold more than $250 million in loans, and Nicholson is pursuing additional capital to expand the program.

"There're two ways to look at our company," says Nicholson. "From one perspective, it's a fairly narrowly prescribed activity involved in education loans for college students. From the outside, that's what one might see. From the inside, we think of ourselves as an increasingly diversified corporation involved in virtually all aspects of education credit."

The results have been impressive. In 1984, USA Funds had $18 million in gross revenue and $1.6 million in net revenue. Since that time, the volume of student loans throughout the country has grown by an average of only 3 percent a year, but the volume for USA Funds averages a 20 percent annual growth rate. In 1990, the companies in USA Group had $105.9 million in gross revenue and $34.5 million in net revenue.

"So the turnaround is substantially complete," Nicholson says. "Now, the challenge is to continue to grow the company."

PHOTO : WhizKids: Roy Nicholson heads the nation's largest guarantor of student loans.
COPYRIGHT 1991 Curtis Magazine Group, Inc.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Mengle, Rev
Publication:Indiana Business Magazine
Article Type:company profile
Date:Apr 1, 1991
Words:1660
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