Default Management in the
US Student Loan Program
Tony Glad, Executive Vice President
ANZFAA – Sydney 2010
A high Cohort Default Rate can:
Result in a loss of eligibility for Title IV loans Possibly reduce school eligibility for other
sources of funding Affect disbursement policies Cause extra work to reduce default rate Cause students to reconsider attending an
institution
Default ConsequencesFor Schools
Loan default rates are on the rise Educational costs/student debt are rising The economy “New” three-year Cohort Default Rate (CDR)
calculations and sanctions “New servicers” - Guarantors and FFELP
lenders are no longer strong players
The Challenges Ahead
1990 (22.4%
)
1995 (10.4%
)
2000 (5.9%)
2003 (4.5%)
2006 (5.2%)
2007 (6.7%)
05
10152025
Default Rate
Default Rate
Cohort Default Rate History
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
115,568 144,128 161,951 204,507 225,271
+24.7% +12.3% +26.4% +10.2%
Borrowers in Default
FY 2005 FY 2006 FY 2007
School Type
DefaultRate
# DefaultBorrowers
DefaultRate
# DefaultBorrowers
DefaultRate
# DefaultBorrowers
Public 4.3% 78,040 4.7% 94,627 5.9% 102,919
Private 2.4% 23,411 2.5% 26,735 3.7% 29,558
Proprietary 8.2% 60,379 9.7% 82,995 11.0% 92,731
Foreign 1.0% 121 1.2% 150 2.2% 163
Total 4.6% 161,951 5.2% 204,507 6.7% 225,371
Good NewsNon US Schools have lower default rates
Cohort Default Rate data is retrospective, and latest published figures are from 2007
US economy started to decline in 2008
Unemployment began to increase
Interest rates on Stafford and PLUS locked in at 6.8% and 8.5% (July 1,2006)mean higher monthly payments than early 2000’s
But Remember…That Economy Thing
The Higher Education Opportunity Act of 2008 expands the cohort default rate window from 2 years to 3 years.
Essentially, borrowers have a longer period in which their defaulting can affect their school’s default rate.
Would take foreign schools from 2007 CDR 2.12% to 3.61%.
Curious about you? www.finaid.org/loans/cohortdefaultrates.phtml
CDR Window Expanding
Three year rates won’t go into full effect until FY2011’s data is available, so sanctions based on this won’t go into effect until FY2014
New sanction levels-3 years at 30% (up from 25%) lead to ineligibility15% (up from 10%) for 30 day delay
for 1st yr and multiple disbursement rules
CDR Window Expanding – ctd.
First year>30% School must develop a default prevention plan and task forceSubmit plan to ED
Second consecutive year> 30%School must review/revise planSubmit revised plan to EDED may require additional efforts
Third consecutive year> 30% Loss of eligibility
Three Year Sanctions
Guarantee agencies and FFELP lenders now out of the picture
Reporting of student loan amounts, revisions, refunds and cancellations must be done by school via NSLDS◦ A return of funds to G5 is not automatically
reported; school must do so via COD and NSLDS
Increased School Responsibility
Servicer NSLDS Code
Borrower phone
School Phone
Website
ACS 700577 800-508-1378 866-938-4750 www.ed-servicing.com
Great Lakes 700581 800-236-4300 888-686-6919 www.mygreatlakes.org
Nelnet 700580 888-486-4722 866-463-5683 www.nelnet.com
PHEAA 700579 800-699-2908 800-655-3813 www.mtfedloan.org
Sallie Mae 700578 800-722-1300 888-272-4665 www.salliemae.com
DL Servicers
Multiple servicers used to create an environment of competition to ensure student borrowers receive the best in business service
All of a borrower’s loans should be at one servicer
School may not designate a servicer
Loan volume will be allocated based on default management performance and customer
Satisfaction surveys (borrower, school, ED)
DL Servicers
Counseling strategy
Data collection
Data reporting
Contact with student
Key Steps to Effective Default Prevention
Solid counseling program using Entrance Counseling◦ Required for all first time borrowers in the Federal
programs◦ Can be an institutional requirement for all
borrowers
Should be done before student arrives and funds disbursed
Entrance Counseling
Studentloans.gov◦ Links in with Direct Loan system
Mapping your future◦ Same process many have been using◦ Verifying if still allowed for foreign schools
In person presentation Stronger impact and more dynamic interaction
Entrance Counseling
Must be made available to all students when they graduate or cease to be enrolled at least half-time
Harder to enforce than Entrance Counseling◦ What things have you done?
If student doesn’t attend need to follow up
Exit Counseling
Studentloans.gov◦ Links in with Direct Loan system
Mapping Your Future◦ Same process many have been using◦ Still exists – for now
In person presentation Stronger impact and more dynamic interaction
Exit Counseling Option
What must you do if a student doesn’t do Exit Counseling before leaving your university?
Either: Ensure that borrower completes
interactive electronic counseling, Mail written materials to the borrower at
their last known address within 30 days after learning they withdrew or failed to complete exit counseling.
Missed Exit Counseling?
It is important to maintain current records showing the students ◦ Mailing Address◦ Phone Numbers◦ Other contact information
Will be used by servicers chasing the student during delinquency (before a student defaults)
Data Collection
Keep NSLDS up-to-date with all enrollment data
Easier now there is only one lender, but university now bears full responsibility for reporting – no lender or guarantor will do it on your behalf
Keeping servicer informed when student withdraws◦ Let them know within 30 days if student leaves before
expected completion date
Data Reporting
Students are always more likely to want to stay in touch with the university rather than a lender
Maintaining an alumni connection is often best way to make sure you have contact details
Contact with students
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