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

Session C-21

Promote Student Success,Manage Delinquency

and Prevent Defaults

John Pierson Mark Walsh

U.S. Department of Education

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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

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Official Cohort Default Rates

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Cohort Default Rate By Sector

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National Borrowers in Default

* 2006 total includes 150 defaulters from foreign schools not reflected on next graph (slide #6)

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Defaulted Borrowers By Sector

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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?

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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

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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

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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

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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

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Prevent Default At Your School

Making Strategic Choices

With unlimited time/resources, you would…

But of course your resources are limited, soyou must consider how to best use availableresources to reduce loan default among yourStafford and private loan borrowers.

Use of traditional and non-traditional defaultprevention strategies can be effective.

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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

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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

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Financial Literacy Programs

Things to consider in developing a financialliteracy program include:

• Identification of objectives• Developing your program• Implementing your program • Promoting your program• Measuring outcomes• Refining

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Financial Literacy Resources

Money Smart - A Financial Education Program

U.S. Federal Reserve System

- Federal

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Assisting Borrowers As They Approach Repayment

Of the borrowers who defaulted, 91% didnot receive their full 6 month grace perioddue to late or inaccurate enrollmentnotification by the school.

Source: August 2008 Analysis of Federal Direct Loan Portfolio

How critical is this?

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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?

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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

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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

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Assisting Borrowers in Repayment

Late Stage Delinquency Assistance (LSDA)involves school personnel reaching out toseriously delinquent borrowers (240+ days),and facilitating the critical contact with theloan servicer to prevent borrowers from goinginto default.• Direct Loan Schools: (888) 877-7658 • FFELP Schools: Contact your guarantor(s)

and lenders for details

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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

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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

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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”

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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)

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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

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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.

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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

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Borrowers Who Graduate… and Borrowers Who Don’t…. What does this mean for your defaultprevention efforts?

Let’s take a look at both of these groups

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Borrowers Who Do Graduate …….And Then Default• This is becoming

more common. Why?

• What are the implications for default prevention?

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Borrowers Who Don’t Graduate ….…And Then Default

The Direct Loan program serves 6-7 millionstudent loan borrowers. Of the borrowers whodefaulted, 70% withdrew without completingtheir academic program. (actual population)

While different measures of success exist,this is an important indicator that students whofail to complete are at high-risk to default.

Source: August 2008 Analysis of Federal Direct Loan Portfolio

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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

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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.

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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

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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?

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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

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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

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To Achieve Maximum ResultsSchool 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

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Efforts in Support of Default Prevention Across the U.S.

• State projects: Georgia Nevada Arkansas Ohio

• School organizations: FAPSC, CCA

• Accrediting agencies

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Two State Project Examples

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State Project – Nevada Team

Joint project included representatives fromstate financial aid association; two-yearand four-year public institutions across thestate; and the Nevada System of HigherEducation (NSHE).

NSHE identified borrower characteristicssuitable for a data analysis, then consultedwith schools to finalize the list.

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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

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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)

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What They Found

NEVADANEVADANEVADA

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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

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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)

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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 defaultersfor 3 years against their database Stage two: additional data elements were collected locally by each school

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Georgia Project – Data Elements

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

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What They Found

GEORGIA

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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

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National Career School Project

CCareer CCollege AAssociation

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CCA Default Prevention Project

• Initiated in 2007• Brought together a project team composed

of the largest CCA member schools • Project goals

– Reduce delinquency and default among project team schools

– Explore the relationship between student success and loan default

– Identify a set of methodologies and best practices to share with the higher education community through default prevention training

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CCA Project - Methodology

• Advisory team mapped out the project details, goals, timeframes

• Advisory team identified the data elements they wished to investigate, including: GPA, program of study, degree type, dependent/independent, gender, preparation type (GED, ATB, HS grad), OPB at default, private loan, first generation, probation/SAP, reason left school, race and ethnicity

• Schools are actively collecting and analyzing data

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CCA Project - Drilling DownAn example of school-based activity withinthis project:

Kaplan Higher Education (KHEC) is a memberof the CCA Default Prevention ProjectAdvisory team.

• Strategies utilized by KHEC and other members of this team

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CCA Project - Drilling DownKHEC began their participation by analyzing asingle school - Heritage College in Las Vegas.

• Let’s consider– How they approached their evaluation of student

loan defaults at Heritage– What resources were required– What the analysis revealed– The steps they took to reduce the risk of loan

default– The results achieved– Future plans

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CCA Project – Status Report

The CCA project will continue throughout2009 with completion of the data analysisand the development of default preventiontraining materials and media.

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Conference PC Lab

Come visit us at the Default PreventionTable in the PC Lab:

• Obtain answers to questions on default prevention strategies or topics

• Learn more about the CCA and state projects

• Collect FSA brochures and handouts• Receive a copy of your Unique School

Report containing 2004-2006 Official CDR data

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Contact InformationWe appreciate your feedback and comments. We can be reached at:

Mark Walsh• Phone: 816-268-0412• Email: [email protected]• Fax: 816-268-0441

John Pierson• Phone: 404-562-6269• Email: [email protected]• Fax: 404-562-6283