Panel on Delinquency and Default Measures Student Financial Aid Research Network (SFARN) Portland, OR June 20-21, 2013

Panelists Sean Simone (Panel Chair) Statistician & Associate Project Officer, National Postsecondary Student Aid Study National Center for Education Statistics, U.S. Department of Education Alisa Cunningham Senior Associate Institute for Higher Education Policy Jeff Webster Assistant Vice President, Research and Analytical Services Texas Guaranteed Student Loan Corporation Jennie Woo Senior Research Associate RTI International

Agenda 3 Propositions on Delinquency/Default Measures Panelist Responses Open Discussion

Proposition #1 Challenges remain in measuring delinquency and/or default due to specialized business practices for student loans.

Default –To fail to fulfill a contract, agreement, or duty. –Examples include: To fail to meet a financial obligation and To fail to do something required by law. Delinquency –A debt on which payment is due. Proposition #1 Definitions

In practice there are business practices and legal requirements for administering FFEL and Direct Loans: –Delinquency is identified after 60 days of nonpayment, but this may be difficult to measure. –Default is identified after 270 days of nonpayment. Proposition #1 Definitions

Direct LoansFamily Federal Education Loan Program Private Student Loans Good standingOn-time, deferred, or forbearance On-time only Delinquency1 – 269 days (required reported to all credit bureaus after 60 days) 1 – 269 days (required to report to at least one credit bureau – 60 days is recommended) 1 – 119 days (may report to credit bureaus any time) Default270 days (no further federal loans issued) 270 days (no further federal loans issued) 120 days Curing/Rehab- ilitating Loans 360 days and 9 consecutive payments 360 days and 9 consecutive payments (loans may be repurchased by servicer) Default cannot be removed Debt collection361 days – sent to Debt Management and Collections contractor (DMCS) Guarantee agency serves as the debt collection agency. Proposition #1 Definitions

Proposition #2 Not all delinquencies and defaults are equal and we should not measure them as if they are the same.

Scenario #1 – Multiple Loan Mona Mona attended two institutions for a total of 6 years and has 11 student loans valued at $25,000. The loans are held by three servicers as a result of lenders transferring/selling loans. She has lost track of one $500 loan from 4 years ago. When she moved out of her parent’s house, she didn’t know about the third lender and made no payments after the grace period expired and is 280 days overdue. Proposition #2 Differing Scenarios of Delinquency

Scenario #2 – Unemployed Ed After graduating Ed consolidated his loans into 2 Direct Consolidation Loans valued at $60,o00 and made 17 on-time payments. Ed recently lost his job and was unable to make payments on both loans. He is 100 days overdue. Proposition #2 Differing Scenarios of Delinquency

Scenario #3 – Attentive Alice After recently graduating Alice had 8 Direct Subsidized and Unsubsidized loans valued at $15,000. After the grace period ended on her loans, she was still unemployed. Five days after the due date on her loans, she contacted her servicer and negotiated a Forbearance and went on an ICR loan payment schedule. Proposition #2 Differing Scenarios of Delinquency

Scenario #4 – Attentive Alex After recently graduating Alex had 10 loans with three servicers valued at $20,000. After the grace period ended on his loans, he diligently paid his loans. Alex inadvertently forgot about a servicer holding a $500 loan and was 70 days overdue by the time the servicer tracked him down. Proposition #2 Differing Scenarios of Delinquency

Scenario #5 – Don’t Care Dave Dave has been in school for 1 year and has amassed $1,500 in student loans and has not completed his culinary arts certificate. After stopping out he has not made any payments and is 290 days past due. Proposition #2 Differing Scenarios of Delinquency

Proposition #3 It is unclear what current student loan default and delinquency measures mean. –Is there an agreement on an acceptable percent of students that default? –At what point do policymakers, university/institution staff/financial aid administrators need to make an intervention?

Proposition #3 What is unacceptable? It is difficult to evaluate student loan delinquency or default measures because: –Student loans can be rehabilitated removing the default from the student record. –There are no other measures (aside from past history) available to evaluate if students are defaulting at “high” levels. Comparable measures for other financial products suffer from survivorship bias.

Proposition #3 What is unacceptable? TypeRateDate S&P/Experian First Mortgage Default Index1.41%March 2013 S&P/Experian Second Mortgage Default Index 0.69%March 2013 MBA: Foreclosure Rate0.70%February 2013 Treasury: Office of the Comptroller of the Currency (OCC) Government Guaranteed Mortgages in Foreclosure 3.50%March 2013 (4 th Quarter 2012) Treasury: OCC Seriously Delinquent Mortgages 4.40%March 2013 (4 th Quarter 2012) Mortgage Measures

Panelist Response Alisa Cunningham Senior Associate Institute for Higher Education Policy Jeff Webster Assistant Vice President, Research and Analytical Services Texas Guaranteed Student Loan Corporation Jennie Woo Senior Research Associate RTI International

Open Discussion