Risk Management and Student Loan Default

What is a Cohort Default Rate (CDR)?• A “cohort” is a group of Stafford Loan Borrowers

who entered repayment within a given federal fiscal year (FY).

• A Cohort Default Rate (CDR) is the percentage of those borrowers in a school’s cohort who defaulted within that federal fiscal year or within the next two fiscal years (24 months) and the next three fiscal years (36 months).

Cohort Default Rate

Cohort Default Rate Date Range

Note: Students entering repayment today will be part of the official 2013 CDR which will not be released until September 2016.

Fiscal Year

Borrowers EnterRepayment

(Denominator)

Borrowers in RepaymentWho Default(Numerator)

Official CDR Published

CDR Usedfor School Sanctions

2009 10/1/2008 - 9/30/20092-Year: 10/1/2008 - 9/30/2010

3-Year: 10/1/2008 - 9/30/2011

2-Year: Sept. 2011

3-Year: Sept. 20122-Year rate (25%)

2010 10/1/2009 - 9/30/20102-Year: 10/1/2009 - 9/30/2011

3-Year: 10/1/2009 - 9/30/2012

2-Year: Sept. 2012

3-Year: Sept. 20132-Year rate (25%)

2011 10/1/2010 - 9/30/20112-Year: 10/1/2010 - 9/30/2012 3-Year: 10/1/2010 - 9/30/2013

2-Year: Sept. 2013 3-Year: Sept. 2014

2-Year rate (25%)3-Year rate (30%)

2012 10/1/2011 - 9/30/2012 3-Year: 10/1/2011 - 9/30/2014 3-Year: Sept. 2015 3-Year rate (30%)

2013 10/1/2012 - 9/30/2013 3-Year: 10/1/2012 - 9/30/2015 3-Year: Sept. 2016 3-Year rate (30%)

2014 10/1/2013 - 9/30/2014 3-Year: 10/1/2013 - 9/30/2016 3-Year: Sept. 2017 3-Year rate (30%)

2-Year Cohort Default Rate Trends

Source : Jordan Weissmann, The Atlantic, “Student-Loan Defaults are Still Soaring Thanks to Washington’s Neglect

Comparison of FY 2011 Official National 2-Year Rates to Prior Three Years

Public Institution Comparison

2007 2008 2009 2010 20110%

2%

4%

6%

8%

10%

12%

14%

16%

9.30%

15.00%

10.00%

Less than 2 years2 - 3 years

All schools - na-tional average

Source : U.S. Department of Education

School Classification

FY 2010 3-Year CDR By School Type

Source : Jordan Weissmann, The Atlantic, “Student-Loan Defaults are Still Soaring Thanks to Washington’s Neglect”, 2013.

3-Year Cohort Default Rate History

Source : U.S. Department of Education

Schools with a single-year CDR of 30% or greater must:• Establish a default prevention task force• Develop a default prevention/reduction plan with

measurable objectives for lowering the CDR• Submit the default reduction plan directly to DOE

Schools with two consecutive years of CDRs of 30% or greater must:• Revise the default reduction plan• Implement additional measures to prevent and reduce

defaults• May be subject to provisional certification

3YR CDR Danger Zone

Schools with three consecutive years of CDRs of 30% or greater would lose eligibility to participate:

• Pell Grant• Federal Direct Loans

School with a SINGLE year CDR of 40% or greater would lose eligibility to participate:

• Federal Direct Loans

3 YR CDR Danger Zone

Corrective Action and Sanctions

For-profi

t73%

Pri-vate11%

Public16%

Source : Stephen Burd, Higher Ed Watch, “The Real Story Behind Corinthian Colleges’ Plummeting Default Rates” 2012.

2009 3-Year CDR >30%, by Sector

For-profit 64.3%Pri-

vate 7.7%

Public 28.0%

2010 3-Year CDR >30%, by Sector

Loan Servicing Appeal• Within 15 days of notification of official rate• Fees may apply

Participation Rate Index • # Borrowers & # Students enrolled at least half-time• http://www.ticas.org/pub_view.php?idx=901

Economically Disadvantaged Appeal• Low Income & Placement Rate• Low Income & Completion Rate

Appeal Options Include

Why now?• Economy

• Split servicing

• Loans transitioned to different servicers

• Graduate underemployment

• Transition to 3-Year Cohort Default Rate (CDR)

• Predatory practices – soliciting payments from students to counsel on default/delinquency resolution

• Reduction in free outreach initiatives

Student Loan Risk Management

% of Student Loan Balances 90+ Days Delinquent

Source: FRBNY Consumer Credit Panel/Equifax; Data displayed in maps are as of December 31, 2012.

Delinquency Rates for Community Colleges

Source: Delinquency: The Untold Story of Student Loan Borrowing. March 2011. Report by the Institute for Higher Education Policy

24%

16%36%

24%

Timely repayment

Deferment/forbearance not delinquent

Delinquent but not defaulted

Default

*Does not include borrowers with consolidation loans.

The Biggest Risk Factor

Students who do not graduate• 62% of borrowers who default did not complete their

program of study!• Risk factors affecting persistence and attainment:

— Delayed enrollment— Part-time enrollment— Working full-time while enrolled— Single parent status

Other Risk Factors

Pell recipientsStudents have limited financial resources to use to repay loans if they do not graduate, if unemployed or if wages do not increase following program completion.

Parent educational attainmentDefault is less likely if at least one parent has a Bachelor’s degree.

Larger household sizeStudents from larger households may be at higher risk of default.

• Colleges are open access

• Retention and graduation rates are critical

• Default rates may be considered a “Financial Aid” issue by administration

• Staffing and technological resource constraints

• Borrowers who become delinquent are no longer your students

Challenges to Keeping CDR Low

Option 1Cease student loan program participation• Negative impact on enrollment and access

• CDR rates and defaults continue for several years

Reducing Risk

Option 2Develop default management plan and devote resources to manage risk

• Default management task force• Holistic approach – school wide• Create plan/work the plan• Know your RISK• Make it an institutional priority

Reducing Risk

Best Practice

Student Success

Financial Literacy

Early Intervention

& Grace Counseling

Default Prevention / Repayment Counseling

CDR Challenges /

Appeals

Where to Start

School-based products to help students understand financial products and services.

Goal: to change student attitudes toward debt and reduce over-dependence on student

loans.

College completion is the best default

prevention tool in a school’s tool kit!

Online entrance and exit programs are not enough – in person counseling, budgeting

and borrower education needed

Only 10% of schools currently challenge draft CDR data. The

DOE estimates that 40% of challenges submitted are

accepted.

Retention

Outreach to delinquent borrowers to offer solutions- emphasizing affordable repayment options.

• Increase resources for financial aid counseling– Institutional control of loan process

– Staff training and technology

– Gather reference data

• Outsource or Insource outreach initiatives– Post enrollment

– Repayment education and assistance

– Helps borrowers be successful long term

– Re-enrollment counseling/collaboration with Retention Office

Risk Management & Student Success

• 72 Districts, 112 Colleges• 2.35 million students (2012-13)• 19 colleges no longer in federal loan

program• 93 colleges still participating in federal loan

program• 63,000 loan borrowers – 2.68%

California Community Colleges (CCC)

• Three colleges had FY09 rates above 30%• 12 colleges had FY10 rates above 30%– Three reached their 2nd year above 30%– One school is at its 3rd year above 30%

• Several other colleges are trending to above 30% in future years

• All colleges will be eligible for low participation rate appeals if they reach three years above 30%

California Community Colleges (CCC)

• Have retained consultant to assist• Tier 1 = over 30% for two years• Tier 2 = over 30% for one year– Default prevention plans– Risk analysis– Third-party service contract negotiation

• Tier 3 = between 20% and 30%– Risk analysis– Discuss need for third-party services

CCC Default Prevention Initiative

• The System Office is considering purchasing financial literacy services for all colleges.

• The Chancellor’s Office is recommending that all schools be involved in the initiative including those no longer actively participating in the federal loan program.

CCC Default Prevention Initiative

• Gainful Employment

• College support loan limit reductions for community colleges

• DOE may consider program level default rates

• Legislator rhetoric regarding “risk share”

Future Regulatory Considerations

Judith Witherspoon, Senior Vice PresidentEdfinancial Services865.342.5200jwitherspoon@edfinancial.com

Rhonda Mohr, Specialist, Student Financial AidCalifornia Community Colleges Chancellor’s Office916.323.6894rmohr@cccco.edu

Contact Information