loan default prevention
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TONY D. CARTERDIRECTOR OF STUDENT FINANCIAL AID
UNC CHARLOTTE
Loan Default Prevention
Cohort Default Rate (CDR)
The percentage of a school’s federal student loan borrowers who enter repayment within the cohort fiscal year (denominator) and default (numerator) within the cohort default period
# who default-----------------------------------------------------------------------------------------------
# who enter repayment
= CDR
Recent data shows 25% increase in CDRs
FY10 CDR is 9.1%
2010 CDRs by Sector
Public school rates increased from 7.2% to 8.3% (15.3% increase)
Private school rates increased from 4.6% to 5.2% (13% increase)
For-profit school rates decreased from 15% to 12.9% (1st time in 4 years)
Why the Increase?
Hard economic times - more difficult for students to repay their loans
Borrowers struggling with unemployment in a weak economy
Increased enrollment in for-profit schools where default rates are higher (47% of defaulters although they enroll only 13% of students)
Financial aid offices struggling with record workloads and new regulatory requirements – leaves fewer resources for critical one-on-one counseling
Default Prevention Challenges
Increasing loan default in a changing landscape
The consequences of loan defaultThe recessionThe dollars in defaultThe “new” 3-year cohort default rate
calculation
The Changing Landscape
Loan defaults increasing for most schoolsEducational costs continue to riseMore students borrowing more moneyCombination of Direct Loans and private
loans equal greater debtChanges to CDR calculation accompanied by
new sanctions
The Consequences of Default
Not only does student loan default impact the integrity of the student loan programs, but there are significant consequences for:
Taxpayers Schools Borrowers
The Consequences of Default
For the borrowerDamaged credit report (7 years minimum)Higher interest rates for yearsWage garnishmentSeizure of federal and state tax refundsLegal action in a federal district courtTitle IV ineligibleNo mortgage loansOthers
The Consequences of Default
For the school –The CDR is a measure of administrative
capability. High CDRs may:Result in adverse publicityNegatively reflect on school qualityResult in loss of Title IV eligibilityThreaten continued access to both DL and
private loan fundsResult in extra work to reverse high rates
The Recession
CDR default data is retrospective, so the impact of the recession is seen in FY 08, FY 09, and FY 10 CDR calculations
More borrowers are having difficulty repaying their loans
The recession is occurring concurrent with the change from a 2-year to a 3-year CDR calculation
Some schools may face compliance difficulties due to CDRs in the coming years
National – Borrowers in Default & Annual Percentage
In FY10, approximately 375,000 student borrowers defaulted – 325% increase in 7 years!
The Dollars in Default
The volume of dollars in default is not currently used to measure schools, however, it impacts the integrity of the student loan program
Big schools + Big volume = Big Dollars in Default
Private loans = more debt for borrowersAccomplishment of the President’s education
priorities depend in part on repayment of student loans
National – Dollars in Default & Annual Percentage
The 3-Year CDR Calculation
Expands the default tracking window from a 2-year period to a 3-year period
Creates a transition period (FY09/10/11)Raises penalty threshold from 25% to 30%
with a new set of consequences and a possible compliance issue in September 2014 (FY 2011 CDR)
Increase availability of “disbursement relief” from 10% to 15%
2 to 3-Year CDR Scenario
Numerator = # of borrowers from the denominator who default within a FY
Denominator = # of borrowers who enter repayment within a FY
FY-09 FY-10
FY-09 FY-10 FY-11
125
5,000
230
125 230 250
5,000
3555000 = .071 or 7.1%Released Sept 2011
6055000 = .121 or 12.1%Released Sept 2012
3-Year CDR Sanctions
Beginning with the 2011 CDR (published in September 2014), schools with CDRs of 30% or higher must take certain corrective actions:
Create a Default Prevention Team
Submit a Default Prevention Plan to FSA for review
3-Year Sanctions – The Details
First Year at 30% or moreDefault Prevention Plan and Task ForceSubmit Plan to FSA for review
Second consecutive year at 30% or moreReview/revise Default Prevention PlanSubmit Revised Plan to FSAFSA may require additional steps to promote student loan
repayment
Third Year at 30% or moreLoss of Eligibility for Pell/DLSchool has appeal rights due to extenuating circumstances
CDR Disbursement Waivers
New threshold: Schools with a default rate less than 15% for the 3 most recent fiscal years:
May disburse a single term loan in a single installment, and
Need not delay the first disbursement to a first-year undergraduate borrower for 30 days
Traditional Default Prevention Strategies
Primarily involves the financial aid office and focuses on helping borrowers to develop a healthy relationship with their loans to include:
Understanding loan repaymentTeaching financial literacyUpdating enrollment status changesReaching out when help is needed
Entrance Loan Counseling
Provide information which includes:Job opportunities & salary informationEstimated monthly loan paymentProviding loan servicer contact informationObtaining good borrower contact information“Self-help” via NSLDS for StudentsCounsel students against returning to school
only to avoid entering repayment on existing loans
Financial Literacy
Correlation exists between increased financial literacy and decreased defaults
Schools can play an important rolesMake it part of your first year curriculumOffer a class for credit if possibleConsider on-line financial literacy programs
Financial Literacy & Private Loans
May still spell trouble for student borrowers, especially when Federal Student Loans are not their first choice.
1 in 4 private loan borrowers in 2007-2008 did not take out federal loans
91% of private loan borrowers at community colleges in 2007-08 did not exhaust federal student aid first
Volume is decreasing and the Secretary now has some authority over them
Protecting the Grace Period
Of the borrowers who defaulted, 91% did not receive their full 6-month grace period due to late or inaccurate enrollment notification by the school.
Schools must learn when a borrower leaves campus and promptly report this to NSLDS.
Why is this so important?
Servicer Repayment Counseling
During the grace period your Loan Servicer does the following:
Establishes a relationship with the borrowerEnsures the correct repayment statusDiscusses the appropriate repayment planPromotes on-line self-serviceUpdates and enhances borrower contact
informationDiscusses consolidation options
Assist Borrowers in Repayment
Request delinquency reports from your DL servicer
Review updated contact informationContact the delinquent borrowers
The DL servicers and/or FSA Default Prevention can help prepare your staff
Points to Remember
The rate, number of borrowers, and dollars in default are increasing
The combination of the recession and the new 3-year CDR calculation will cause rates to increase
Schools should examine their CDR history and assess their risk for exceeding thresholds
Take positive steps to reduce defaults on your campus
Loan Default Prevention
Questions?
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