TONY D. CARTERDIRECTOR OF STUDENT FINANCIAL AID

UNC CHARLOTTE

Loan Default Prevention

Cohort Default Rate (CDR)

The percentage of a school’s federal student loan borrowers who enter repayment within the cohort fiscal year (denominator) and default (numerator) within the cohort default period

# who default-----------------------------------------------------------------------------------------------

# who enter repayment

= CDR

Recent data shows 25% increase in CDRs

FY10 CDR is 9.1%

2010 CDRs by Sector

Public school rates increased from 7.2% to 8.3% (15.3% increase)

Private school rates increased from 4.6% to 5.2% (13% increase)

For-profit school rates decreased from 15% to 12.9% (1st time in 4 years)

Why the Increase?

Hard economic times - more difficult for students to repay their loans

Borrowers struggling with unemployment in a weak economy

Increased enrollment in for-profit schools where default rates are higher (47% of defaulters although they enroll only 13% of students)

Financial aid offices struggling with record workloads and new regulatory requirements – leaves fewer resources for critical one-on-one counseling

Default Prevention Challenges

Increasing loan default in a changing landscape

The consequences of loan defaultThe recessionThe dollars in defaultThe “new” 3-year cohort default rate

calculation

The Changing Landscape

Loan defaults increasing for most schoolsEducational costs continue to riseMore students borrowing more moneyCombination of Direct Loans and private

loans equal greater debtChanges to CDR calculation accompanied by

new sanctions

The Consequences of Default

Not only does student loan default impact the integrity of the student loan programs, but there are significant consequences for:

Taxpayers Schools Borrowers

The Consequences of Default

For the borrowerDamaged credit report (7 years minimum)Higher interest rates for yearsWage garnishmentSeizure of federal and state tax refundsLegal action in a federal district courtTitle IV ineligibleNo mortgage loansOthers

The Consequences of Default

For the school –The CDR is a measure of administrative

capability. High CDRs may:Result in adverse publicityNegatively reflect on school qualityResult in loss of Title IV eligibilityThreaten continued access to both DL and

private loan fundsResult in extra work to reverse high rates

The Recession

CDR default data is retrospective, so the impact of the recession is seen in FY 08, FY 09, and FY 10 CDR calculations

More borrowers are having difficulty repaying their loans

The recession is occurring concurrent with the change from a 2-year to a 3-year CDR calculation

Some schools may face compliance difficulties due to CDRs in the coming years

National – Borrowers in Default & Annual Percentage

In FY10, approximately 375,000 student borrowers defaulted – 325% increase in 7 years!

The Dollars in Default

The volume of dollars in default is not currently used to measure schools, however, it impacts the integrity of the student loan program

Big schools + Big volume = Big Dollars in Default

Private loans = more debt for borrowersAccomplishment of the President’s education

priorities depend in part on repayment of student loans

National – Dollars in Default & Annual Percentage

The 3-Year CDR Calculation

Expands the default tracking window from a 2-year period to a 3-year period

Creates a transition period (FY09/10/11)Raises penalty threshold from 25% to 30%

with a new set of consequences and a possible compliance issue in September 2014 (FY 2011 CDR)

Increase availability of “disbursement relief” from 10% to 15%

2 to 3-Year CDR Scenario

Numerator = # of borrowers from the denominator who default within a FY

Denominator = # of borrowers who enter repayment within a FY

FY-09 FY-10

FY-09 FY-10 FY-11

125

5,000

230

125 230 250

5,000

3555000 = .071 or 7.1%Released Sept 2011

6055000 = .121 or 12.1%Released Sept 2012

3-Year CDR Sanctions

Beginning with the 2011 CDR (published in September 2014), schools with CDRs of 30% or higher must take certain corrective actions:

Create a Default Prevention Team

Submit a Default Prevention Plan to FSA for review

3-Year Sanctions – The Details

First Year at 30% or moreDefault Prevention Plan and Task ForceSubmit Plan to FSA for review

Second consecutive year at 30% or moreReview/revise Default Prevention PlanSubmit Revised Plan to FSAFSA may require additional steps to promote student loan

repayment

Third Year at 30% or moreLoss of Eligibility for Pell/DLSchool has appeal rights due to extenuating circumstances

CDR Disbursement Waivers

New threshold: Schools with a default rate less than 15% for the 3 most recent fiscal years:

May disburse a single term loan in a single installment, and

Need not delay the first disbursement to a first-year undergraduate borrower for 30 days

Traditional Default Prevention Strategies

Primarily involves the financial aid office and focuses on helping borrowers to develop a healthy relationship with their loans to include:

Understanding loan repaymentTeaching financial literacyUpdating enrollment status changesReaching out when help is needed

Entrance Loan Counseling

Provide information which includes:Job opportunities & salary informationEstimated monthly loan paymentProviding loan servicer contact informationObtaining good borrower contact information“Self-help” via NSLDS for StudentsCounsel students against returning to school

only to avoid entering repayment on existing loans

Financial Literacy

Correlation exists between increased financial literacy and decreased defaults

Schools can play an important rolesMake it part of your first year curriculumOffer a class for credit if possibleConsider on-line financial literacy programs

Financial Literacy & Private Loans

May still spell trouble for student borrowers, especially when Federal Student Loans are not their first choice.

1 in 4 private loan borrowers in 2007-2008 did not take out federal loans

91% of private loan borrowers at community colleges in 2007-08 did not exhaust federal student aid first

Volume is decreasing and the Secretary now has some authority over them

Protecting the Grace Period

Of the borrowers who defaulted, 91% did not receive their full 6-month grace period due to late or inaccurate enrollment notification by the school.

Schools must learn when a borrower leaves campus and promptly report this to NSLDS.

Why is this so important?

Servicer Repayment Counseling

During the grace period your Loan Servicer does the following:

Establishes a relationship with the borrowerEnsures the correct repayment statusDiscusses the appropriate repayment planPromotes on-line self-serviceUpdates and enhances borrower contact

informationDiscusses consolidation options

Assist Borrowers in Repayment

Request delinquency reports from your DL servicer

Review updated contact informationContact the delinquent borrowers

The DL servicers and/or FSA Default Prevention can help prepare your staff

Points to Remember

The rate, number of borrowers, and dollars in default are increasing

The combination of the recession and the new 3-year CDR calculation will cause rates to increase

Schools should examine their CDR history and assess their risk for exceeding thresholds

Take positive steps to reduce defaults on your campus

Loan Default Prevention

Questions?