Session C-21

1. Session C-21 Promote Student Success, Manage Delinquency and Prevent Defaults John Pierson Mark Walsh U.S. Department of Education

2. Topics For Today • Recent Cohort Default Rate Data • A Changing Landscape • Default Prevention Strategies • Traditional • Non-Traditional • Understanding the intersection of loan default and student success/retention • Risk and Opportunity: Identifying the solutions • State projects • Career school project

3. Official Cohort Default Rates

4. Cohort Default Rate By Sector

5. National Borrowers in Default * 2006 total includes 150 defaulters from foreign schools not reflected on next graph (slide #6)

6. Defaulted Borrowers By Sector

7. Fast Facts – 2006 Official CDR • National rate increased from 4.6% in 2005 to 5.2% in 2006, a 13% increase • Career schools experienced the most significant CDR rise, from 8.2% in 2005 to 9.7% in 2006, an 18% increase • Defaulted borrowers increased 26.3% between 2005 and 2006 (2004-2005 = 12.4%) • Public and private 4-year schools continue to maintain the lowest CDRs at 3.4%/2.4% • How can these statistics be misleading?

8. The College Opportunity and Affordability Act (HEA Reauthorization) • Calculation period for CDRs expanded from 2 years to 3 years beginning in 2012 • Threshold for sanctions due to high rates increases from 25% for 3 consecutive years to 30% beginning in 2012 • Raises from 10% to 15% the CDR which schools must fall below to be exempt from multiple disbursements and first year student endorsement regulation

9. A Changing Landscape in Higher Education Funding • Educational costs continue to rise • More students borrowing larger amounts • Increased use of Stafford and private loans result in greater loan debt • Higher debt equals increased default risk • Schools require uninterrupted loan capital to operate and higher default rates may result in access problems • Elevated default risk equals an increased risk to private loan capital

10. Private Loans • Often marketed directly to students • Approval is typically based on factors such as the school attended and credit score • Interest rates are variable with no cap • No loan limits or restrictions on fees • May lack borrower protections available in Federal Student Loans • Shorter time frame before default • Are generally more expensive and should not be used until Federal Student Aid has been exhausted

11. Federal Aid First • Distinctions between federal and private loans • Types, amounts of federal aid available • On-line ordering at: http://edpubs.ed.gov • Order by phone at: 1-877- 4ED-PUBS FEDERAL AID FIRST www.federalstudentaid.ed.gov

12. Prevent Default At Your School Making Strategic Choices With unlimited time/resources, you would… But of course your resources are limited, so you must consider how to best use available resources to reduce loan default among your Stafford and private loan borrowers. Use of traditional and non-traditional default prevention strategies can be effective.

13. Traditional Approaches to Successful Default Prevention Financial Aid • Teach borrowers financial literacy • Help borrowers prepare for repayment (especially those who did not complete) • Assist borrowers during repayment, and “rescue” delinquent borrowers utilizing Late Stage Delinquency Assistance (LSDA) • Successful at DL and FFEL schools

14. Financial Literacy • Correlation exists between increased financial literacy and decreased defaults • DCL GEN 05-14 lists financial literacy as one of nine key elements to include in a default prevention and management plan • 14% of students who left college without completing a degree cited financial reasons* * National Center for Education Statistics

15. Financial Literacy Programs Things to consider in developing a financial literacy program include: • Identification of objectives • Developing your program • Implementing your program • Promoting your program • Measuring outcomes • Refining

16. Money Smart - A Financial Education Program Financial Literacy Resources - Federal U.S. Federal Reserve System

17. Assisting Borrowers As They Approach Repayment 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. How critical is this? Source: August 2008 Analysis of Federal Direct Loan Portfolio

18. Servicers Do Pre-Repayment Counseling During Grace Period • Establish relationship with borrower • Ensure correct repayment status • Discuss appropriate repayment plan • Promote self-service through the Web • Update/enhance borrower contact info • Review consolidation options, if appropriate • Crucial for those who drop out…why?

19. Key Defaulter Characteristic Of the borrowers who defaulted, the majority had contact issues: • 49% had bad telephone numbers (actual population) • 95% were not successfully contacted by phone during the 360-day collection effort leading up to default (sample) Source: August 2008 Analysis of Federal Direct Loan Portfolio

20. What Can You Do To Ensure Borrowers Can Be Reached? • Obtain “enhanced” contact info • Verify borrower references • Identify or develop an “early warning” system to let you know when borrowers leave school • Encourage the use of NSLDS for students • Review school records to see if you have better contact information…use it and/or share with your servicer

21. Assisting Borrowers in Repayment Late Stage Delinquency Assistance(LSDA) involves school personnel reaching out to seriously delinquent borrowers (240+ days), and facilitating the critical contact with the loan servicer to prevent borrowers from going into default. • Direct Loan Schools: (888) 877-7658 • FFELP Schools: Contact your guarantor(s) and lenders for details

22. What you need to get started • List of delinquent borrowers in the current cohort: • Request Late Stage Delinquency reports from guarantor or DL Servicer • School-based contact information: • Compare with school records and update guarantor or DL Servicer • Staff training: • DL Servicer and/or guarantor can help prepare your staff for this effort

23. LSDA Contact Methods • Phone calls • Are the most effective • Borrowers will sometimes take calls from school personnel and not lenders or guarantors • Letters • Can be useful, but the other players have used them unsuccessfully • Email

24. Phone Calls Are Most Effective • Only a few calls are needed each month to make a difference in your CDR • Initiate calls when borrowers are most likely to be home (6:00 PM – 9:00 PM) • Utilize school-issued calling cards to make calls outside of traditional work hours (Saturday) • When leaving a voice message avoid using the words “loan” or “delinquency”

25. Phone Calls Are Most Effective • Utilize a call script until practiced • Explain that you are calling to help (use a soft touch – you are not a loan collector) • Make it clear “what’s in it for them” to listen and take action on their own behalf. Stress the urgency of their situation! (the consequences of default) • Present possible solutions • Initiate a three-way call with the guarantor or DL Servicer (stay on the line to provide moral support)

26. If you decide to send a letter… • First, get the borrower to open it! • Hand-address regular envelopes • Use a stamp – not a postage meter • Consider colored envelopes or paper • Personalize the letter – sign it • Postcards can also be effective • The content • Stress the urgency of the situation - these borrowers are at imminent risk of default • Include contact information for yourself and for the guarantor or DL Servicer • Help the borrower understand the consequences of default in plain language

27. If you decide to send a letter… • Include information on repayment options, deferments, and forbearance • Stress that they need to call you, that you can help them resolve their situation • Once the borrower is contacted, if you cannot easily resolve the delinquency, consider a three-way call with the loan servicer. Representatives are trained to resolve delinquencies.

28. If you use email… • Utilize school email addresses (allow students to keep school accounts for a year or two after they leave) • Attach deferment or forbearance forms requested by the borrower • Forward any email responses or completed forms to the right person at the guarantor and/or the Direct Loan Servicer

29. Borrowers Who Graduate… and Borrowers Who Don’t…. What does this mean for your default prevention efforts? Let’s take a look at both of these groups

30. Borrowers Who Do Graduate …….And Then Default • This is becoming more common. Why? • What are the implications for default prevention?

31. Borrowers Who Don’t Graduate ….…And Then Default The Direct Loan program serves 6-7 million student loan borrowers. Of the borrowers who defaulted, 70% withdrew without completing their academic program. (actual population) While different measures of success exist, this is an important indicator that students who fail to complete are at high-risk to default. Source: August 2008 Analysis of Federal Direct Loan Portfolio

32. What are the consequences when a borrower leaves school without completing? • Did not achieve academic credential • Earning power may be reduced • No benefit from school job placement • Has one or more loans to repay • May not have received exit counseling • If the borrower leaves without notifying the financial aid office, they may lose part/all of their grace period

33. Non-Traditional Approach: The Methodology • Driven by the fact that borrowers who do not complete are at high-risk of default (Remember the 70%) • Goal is to increase student success, as successful students are typically in the best position to repay their loans • This strategy cannot be implemented by the financial aid office alone. Allies are others on campus who are working to increase retention and graduation rates.

34. Non-Traditional Approach: The Methodology • Student Success Solutions • Support borrower relationship to their education. (Most defaulters do not complete their academic program) • Increase student success by • Increasing retention/graduation rates • Decreasing program completion time • Help non-completers find employment

35. Non-Traditional Approach: The Methodology • Understanding the unique connections between loan default and student success at your school • Conduct a defaulter data analysis • Where does the trail lead? • What steps do you take? • Who needs to be involved?

36. Methodology: Option #1 • Conduct an analysis to identify default factors in your student population • Obtain Loan Record Detail Report (LRDR) • Query your internal system to obtain demographic data • Goal is to create a picture of your at-risk students so you can properly target your default prevention efforts • Seek assistance from your lenders, guarantor, servicer or FSA

37. Methodology: Option #2 • Present your defaulter list (for last 3 years) to the folks on campus involved in: • Institutional research, and/or • Enrollment management, and/or • Student success activities • Explain: • You are interested in the same students • Their efforts can reduce loan default • Ask their help in understanding how your school can address both student success and loan default

38. To Achieve Maximum Results School strategies should help students • Be more successful as students (as successful students tend to become successful borrowers) • Limit indebtedness • Who are headed into repayment (teach financial literacy, ensure understanding of repayment obligations, obtain current contact info) • When in repayment, and particularly with those who are struggling, use LSDA

39. Efforts in Support of Default Prevention Across the U.S. • State projects: Georgia Nevada Arkansas Ohio • School organizations: FAPSC, CCA • Accrediting agencies

40. Two State Project Examples

41. State Project – Nevada Team Joint project included representatives from state financial aid association; two-year and four-year public institutions across the state; and the Nevada System of Higher Education (NSHE). NSHE identified borrower characteristics suitable for a data analysis, then consulted with schools to finalize the list.

42. Nevada Project - Data Elements • Age • GPA • EFC • First generation status • Enrolled in one or more remedial courses • Selected for verification • Graduated Y/N • SAP Y/N • Withdrew last term of enrollment? • Late registration? • Distance ED only last term • Credits attempted versus credits completed

43. Nevada Project - Methodology • Schools completed the initial data collection • Shared data with NSHE which in turn completed both school by school and system-wide analysis • Findings were published in a report in May 2008(Copies at DP booth in PC Lab)

44. What They Found NEVADA NEVADA

45. Nevada Project Next Steps • Report authors meet with system VPs of academic and student affairs to discuss the data and • Begin to understand the relationship between student success measures and the risk of loan default; and • For individual schools and the system • Determine next steps for current data set • Identify whether additional data is needed • Next phase to be initiated in early FY 2009

46. State Project – Georgia Team • Worked with the Regents Advisory Council on Student Financial Aid (RACSFA) • Met with University System of Georgia (USG) to outline project and goals, and explain relationship between student success and loan default • Interfaced with USG retention, graduation and time-to-completion projects • Created advisory team composed of USG, members of RACSFA, and the Georgia Association of Student Financial Aid Administrators (GASFAA)

47. Georgia Project - Methodology • Advisory team mapped out the project details, goals, and timeframes • Advisory team identified data elements they wished to query in two stages: Stage one: USG runs list of all defaulters for 3 years against their database Stage two: additional data elements were collected locally by each school

48. Stage Two (school collection) Initial registration date EFC FASFA file date Marital status Private loan amount (if known) Additional unsub amount Dependency status Military deployment Exit counseling method (in-person or on-line) Stage One (USG collection) Incorporated the nearly 100 data points that are maintained in the University System of Georgia Data mart Data was queried against 3 years of defaulted borrowers USG chose to cast a wide net initially, and then narrow the focus in Stage Two Georgia Project – Data Elements

49. What They Found GEORGIA

50. Georgia Project - Status Report • The University System of Georgia (USG) • Gathered stage one and stage two data and merged it into one large data set • Conducted an initial analysis of the data and prepared a summary report • Shared the summary report with the Advisory team in September 2008, and with RACSFA membership at their quarterly meeting in October 2008 (Copies at DP booth in PC Lab) • Held meetings to discuss the findings with USG staff, and will schedule meetings with university system VPs for academic and student affairs in early FY 2009