Default ManagementTips For Managing Delinquencies

CAASLAR ConferenceApril 23, 2015

Lisa Koniuto, Director of Business Development

True Default vs. Cohort Default

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What is Default?

A loan is considered “in default” when the borrower fails to make an installment payment when it is due or comply with other terms of the promissory note or written payment agreement.

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What is Cohort?

The school’s cohort default rate is calculated for a particular year based on information that is reported in Part III, Sections D and E

of the FISAP.

It is based on a segment of active loans and the number of borrowers for the purpose of calculating your cohort default rate. A borrower is considered in default when his or her loan is 240

consecutive days past due for monthly billing and 270 consecutive days past due for quarterly billing.

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How is the Perkins default rate calculated?

1. For 30 or more borrowers who enter repayment:- The cohort default rate is the percentage of those current and former

students who enter repayment in that award year on loans received for attendance at the school and who default before the end of the following award year.

2. Fewer then 30 current and former students who enter repayment:- The cohort default rate is the percentage of those current and former

students who entered repayment on loans received for attendance at that school in any of the three most recent award years and who defaulted on those loans before the end of the award year immediately following the year in which they entered repayment.

**A loan enters repayment only once in its life. This repayment begins the day after the end of the initial grace period or the day that the borrower waives his or her initial grace period.5

How would I calculate my Cohort group?

1. Cohort Group: the borrowers who went into repayment during the prior fiscal year.

2. Defaulted Cohort Group: from the borrowers in your Cohort Group, those who are 240 days past due (quarterly billing is 270 days past due) by the end of the current fiscal year.

Defaulted Cohort GroupCohort Group X 100

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Example:

•Current Fiscal Year: July 1, 2014 – June 30, 2015

•Cohort Group: Borrowers who entered into repayment from July 1, 2013 – June 30, 2014

•Defaulted Cohort Group: The borrowers in your Cohort Group whose loan is 240 days past due (quarterly billing is 270 days or more past due) by the end of the current fiscal year (June 30, 2015).

Current Fiscal Year: July 1, 2014 – June 30, 2015Cohort Group: 135Defaulted Cohort Group: 25

25135

X 100 = 18.52%

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Will my Cohort always be calculated the same?

Cohort will always be calculated as shown, UNLESS a school has less than 30 borrowers in their Cohort group (those who went into repayment the prior fiscal year).

How will Cohort be calculated if I have less than 30 borrowers who entered into repayment the prior fiscal year?

1. Cohort Group: the borrowers who went into repayment the past 3 fiscal years.2. Defaulted Cohort Group: from the borrowers in your Cohort Group, those who are

240 days past due (quarterly billing is 270 days past due) in the current fiscal year.

Defaulted Cohort GroupCohort Group X 100

**IMPORTANT – Those borrowers who were considered in Cohort default for any year, within their three-year calculation, will remain in a school’s Defaulted Cohort Group.

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How can I manage my Cohort Default Rate?

You may exclude borrowers from your Cohort group when they:• Voluntarily make six consecutive monthly payments; • Voluntarily make all payments currently due; • Repay the loan in full; • Consolidate;• Receive a deferment or forbearance based on a condition that began prior

to the loan becoming 240/270 days past due;• Rehabilitate the loan after becoming 240/270 days past due; or• Are assigned to the Department of Education under a conditional

discharge due to Total and Permanent Disability.

You may also exclude any loan that has been cancelled or paid-in-full because of:• Death or disability; • Bankruptcy;• Closed school discharge; • Compromise [per 674.33(e)]; or• Write-off [per 674.47(h)].

**Payments obtained through income tax offset, garnishment, income or asset execution, or pursuant to a judgment are not considered voluntary.9

Why is my Cohort Default Rate Important?

According to Federal Regulation 674.5 (Federal Perkins Loan Program Cohort Default Rate and penalties):

•If an institution’s cohort default rate equals or exceeds 25%, the institution’s Federal Capital Contribution is reduced to ZERO.

•An institution with a cohort default rate that equals or exceeds 50% for each of the three most recent years for which cohort default rate data are available is ineligible to participate in the Federal Perkins Loan Program.

*For years ED has not enforced this regulation, but is now contacting schools that meet this criteria*

**Note: Under General Provisions regulations 668.16 (Standards of Administrative Capability), a school may be deemed “administratively incapable” if the school’s default rate exceeds 15%; which could result in ramifications from the Department of Education. This means that a school could be limited in participation of their federal program.

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DEFAULT IS ON THE RISE

The Orange BookThe Federal Perkins Loan Program Status of Default as of June 30, 2014, or the Orange Book has been published. Each school that participated in the Federal Perkins loan program during the 2013-2014 Award Year is listed along with their cohort default rate. This report is based on data submitted by schools in the FISAP for FY 2014. The default rate has increased from last year. This year’s overall Perkins cohort default rate is 11.83%, as compared to an 11.23% default rate for 2013.

You may access the Orange Book at: http://ifap.ed.gov/perkinscdrguide/1314PerkinsCDR.html

National average default rate: 11.83%•11.23% in 2013•11.08% in 2012•8.32% in 2011

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Tips for Managing Your Default Rate

Contacting borrowers at an early stage in repayment and delinquency is key!

• Effective Entrance and Exit Counseling• Make it interesting!• Make it personal – one size does not fit all• Establish a personal contact• Use a combination of delivery methods• Carry-away material – i.e. bookmarks

• Financial Literacy Program• Budget• Knowing what they owe• Clear and simple language of their responsibility

• Early Identification for At Risk Borrowers• Premature withdrawal• Lack of satisfactory academic performance

• Use your resources• Reports – customize – make them work for you!• Pre Collect Programs12

And when that doesn’t work….

No need to reinvent the wheel – use what is already available to you!

Customized Borrower Contacts• Special messages from school on billing statements and past due

notices

Collection Agency Partnerships• Talk with your agencies• Compare your agencies’ success• Share results with your agencies

Entitlements

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Forbearance • Available to borrowers for a period of 3 years• Interest continues to accrue

PERKINS REGULATION: Section 674.33(d) – Forbearance – has been amended to eliminate the requirement that a borrower make a “written” request in order to obtain a forbearance on his or her Perkins Loan. It does not, however, eliminate the requirement of supporting documentation.

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Unemployment and Economic Hardship Deferments• Principal and interest are deferred; not to exceed 3 years

Unemployment – A borrower may defer repayment for up to 3 years, regardless of disbursement date and contrary provision on the prom note, if the borrower is seeking and unable to find full-time employment.

Economic Hardship (Section 674.34(e)) – A borrower is entitled to an economic hardship deferment for periods of up to one year at a time, not to exceed 3 years cumulatively, if the borrower provides the school with satisfactory documentation showing that:

1. The borrower has been granted an economic hardship for either Stafford or PLUS

2. The borrower is receiving federal or state general public assistance3. The borrower is working full-time* and is earning a total monthly gross

income that does not exceed:(1) the monthly earnings of someone earning the minimum wage, or (2) 150% of the poverty line** for the borrower’s family size.***

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Other Items to Consider

Use a customer oriented approach• Treat borrowers individually• Understand their specific circumstances

Rehabilitation

• One-time benefit that enables borrowers to erase past negative credit history

• PERKINS REGULATION: Section 674.39(a)(2) – Loan rehabilitation – A loan is rehabilitated if the borrower requests rehabilitation; and makes a full monthly payment, as determined by the school, within 20 days of the due date, each month for 9 consecutive months.

Temporary or Special Billing • Temporarily bill a borrower an amount smaller than the regular

repayment scheduled• Make sure you have an agreement!

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Encourage auto payment methods

Credit Bureau Reporting

Additional Borrower Contacts • Make it different!• Appeal to sensitivity• Use all means

Skip Tracing • Good demographics are vital for managing delinquencies!• Utilize reference information – ask for new contacts often!• Talk with other departments for updated information• Use NSLDS for potential information, i.e. loan at another

institution• Use other databases, i.e. state tax

Social Media17

Tip Sharing

What works for you?

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Thank you for your participation today!