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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 [email protected]
Rhonda Mohr, Specialist, Student Financial AidCalifornia Community Colleges Chancellor’s [email protected]
Contact Information