Presentation on theme: "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."— Presentation transcript:
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 Fiscal Year Borrowers Enter Repayment (Denominator) Borrowers in Repayment Who Default (Numerator) Official CDR Published CDR Used for School Sanctions /1/ /30/ Year: 10/1/ /30/ Year: 10/1/ /30/ Year: Sept Year: Sept Year rate (25%) /1/ /30/ Year: 10/1/ /30/ Year: 10/1/ /30/ Year: Sept Year: Sept Year rate (25%) /1/ /30/ Year: 10/1/ /30/ Year: 10/1/ /30/ Year: Sept Year: Sept Year rate (25%) 3-Year rate (30%) /1/ /30/20123-Year: 10/1/ /30/20143-Year: Sept Year rate (30%) /1/ /30/20133-Year: 10/1/ /30/20153-Year: Sept Year rate (30%) /1/ /30/20143-Year: 10/1/ /30/20163-Year: Sept 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 Source : U.S. Department of Education School Classification
FY 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 Source : Stephen Burd, Higher Ed Watch, “The Real Story Behind Corinthian Colleges’ Plummeting Default Rates” Year CDR >30%, by Sector 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 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 Report by the Institute for Higher Education Policy *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 recipients Students 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 attainment Default is less likely if at least one parent has a Bachelor’s degree. Larger household size Students 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 1 Cease student loan program participation Negative impact on enrollment and access CDR rates and defaults continue for several years Reducing Risk
Option 2 Develop 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 ( ) 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 2 nd year above 30% – One school is at its 3 rd 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 President Edfinancial Services Rhonda Mohr, Specialist, Student Financial Aid California Community Colleges Chancellor’s Office Contact Information