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Risk Management and Student Loan Default acct 10 11 12

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This presentation was given at the October 2012 Annual Conference of the Association of Community College Trustees. The presentation discusses ways to monitor and improve an institution of higher …

This presentation was given at the October 2012 Annual Conference of the Association of Community College Trustees. The presentation discusses ways to monitor and improve an institution of higher education’s student loan cohort default rate.

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  • If a school’s default rate is above 30% for any single that a official calculation is provided a default management plan must be submitted to the Department of Education, beginning with the FY09 3-year rate. “Sanctions” apply when a school loses eligibility after 3 consecutive years above 30% which could not occur until the FY11 rate is released.The default management plan is created and approved at the school level by a school based default management task force. 2011 is the first year a school can have 3 consecutive 3YR CDR rates.
  • --Federal government database on default rates
  • Transcript

    • 1. Risk Managementand Student Loan Default
    • 2. Cohort Default RateWhat 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 a specified period of time − 2-Year CDR: by the end of the next fiscal year − 3-Year CDR: within the next two fiscal years
    • 3. Changes to the Cohort Default Rate2-Year Cohort Default Rate Formula FY 2011 10/1/2010 to 9/30/2012  10/1/2010 to 9/30/2011Loss of eligibility threshold occurs with CDR over 25% for three previous years 10/1/10 9/30/11 9/30/12 9/30/13New 3-Year Cohort Default Rate Formula FY 2011 10/1/2010 to 9/30/2013  10/1/2010 to 9/30/2011Loss of eligibility threshold occurs with CDR over 30% for three previous years
    • 4. Cohort Default Rate Date Range Borrowers Enter Borrowers in Repayment CDR UsedFiscal Official CDR Repayment Who Default for School Year Published (Denominator) (Numerator) Sanctions 2-Year: 10/1/2008 - 9/30/2010 2-Year: Sept. 20112009 10/1/2008 - 9/30/2009 2-Year rate (25%) 3-Year: 10/1/2008 - 9/30/2011 3-Year: Sept. 2012 2-Year: 10/1/2009 - 9/30/2011 2-Year: Sept. 20122010 10/1/2009 - 9/30/2010 2-Year rate (25%) 3-Year: 10/1/2009 - 9/30/2012 3-Year: Sept. 2013 2-Year: 10/1/2010 - 9/30/2012 2-Year: Sept. 2013 2-Year rate (25%)2011 10/1/2010 - 9/30/2011 3-Year: 10/1/2010 - 9/30/2013 3-Year: Sept. 2014 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%)Note: Students entering repayment today will be part of your official 2013 CDR which will not bereleased until September 2016.
    • 5. 3-Year CDR - published 2012School 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 DOESchool 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
    • 6. Corrective Action and Sanctions3 consecutive years with officialCDRs of 30% or greater The US DOE recentlySchool would lose eligibility to stated that schoolsparticipate in: can expect CDRs to increase by over 80% under the new 3-Year• Pell Grant calculation.• Federal Direct Loans
    • 7. Corrective Action and Sanctions 1% 1% 2% 3% Public, 4-year 5% Private, Less-than-2-yearFor the 2009 7% Public, Less-than-2-year3-Year CDR 41% Private, 2-yearcalculation, 218schools 13% For-Profit, 4-yearexceeded the Private, 4-year30% threshold Public, 2-year For-Profit, 2-year 27% For-Profit, Less-than-2-yearSource : Rachel Fishman, Higher Ed Watch, “Shape Up or Lose Out: The 218 Institutions that MustDevelop Default Prevention Plans”, 2012.
    • 8. Risk ManagementWhy is it important?• For schools − May result in provisional certification or loss of federal aid eligibility − Negative publicity for schools − Additional resources needed to reverse − No quick fix• For your former students − Damaged credit − No federal/state aid eligibility − Collection and court costs, wage garnishment, etc.
    • 9. Default Rate History After Dip, Loan-Default Rates Climb to Highest Rate Since 1997Source : U.S. Department of Education
    • 10. Public Institution Comparison Comparison of FY 2010 Official National 2-Year Rates to Prior Three Years16% School Classification14% Less than 2 years12% 2 - 3 years10% 8% All schools - national average 6% 4% 2% 0% 2007 2008 2009 2010Source : U.S. Department of Education
    • 11. Delinquency Rates for Community Colleges Timely repayment 24% 24% Deferment/forbearance not delinquent Delinquent but not defaulted Default 16% 36% *Does not include borrowers with consolidation loans.Source: “Delinquency: The Untold Story of Student Loan Borrowing”, March 2011. Report by the Institute forHigher Education Policy.
    • 12. Student Loan Risk ManagementWhy now? • Economic slump • Split servicing and PUT loans • Graduate underemployment • Transition to 3-Year Cohort Default Rate (CDR)
    • 13. At-Risk Borrowers Average Loan Repayment RatesCollege Type < 10% Pell Grant Recipients > 66% Pell Grant RecipientsPublic 4 year 68.4% 12.7%Public 2 year 43.9% 21.0%Private 4 year 68.6% 29.0%Proprietary 53.3% 25.9%Total 66.3% 26.3%Source : Mark Kantrowitz, Student Aid Policy Analysis, “The Impact of Loan Repayment Rates on PellGrant Recipients”, 2010.
    • 14. The Biggest Risk FactorStudents 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
    • 15. Other Risk FactorsParent educational attainmentDefault is less likely if at least oneparent has a Bachelor’s degreeLarger household sizeStudents from larger households maybe at higher risk of default
    • 16. Financial Attitudes & Behaviors Across the StatesSource : EverFi, ButtonwoodTM study, 2011.
    • 17. Challenges to Keeping CDR Low• Community colleges are open access• At-risk students are more likely to attend community colleges• Retention and graduation rates are critical• Strained staffing resources• At one time, default rates were considered a “Financial Aid” issue by administration• Borrowers who become delinquent are no longer your students
    • 18. Action Plan Options 1) Change enrollment policies?Source : Jennifer Cohen Kabaker, Ed Money Watch, “3-Year Student Loan Cohort Default Rates Reveal ConcerningGraduation Rate Trend”, 2012.
    • 19. Action Plan Options % Change in FTE2) Eliminate Community College Enrollment student loan School A -2.4% program School B -5.4% School C -4.6% participation? School D -4.8% School E* -13.3% School F -7.1% School G -0.2% School H -3.5% School I -5.1% School J -6.2% School K* -8.1% School L -7.6% School M -4.5% *Schools who did not offer student loans
    • 20. Action Plan Options3) Appeal CDR sanctions? • Grounds for appeals • Resource waste • Management time • Not guaranteed • Does not help students
    • 21. Action Plan Options4) Develop default management plan and devote resources to manage risk? • Default management task force • Create plan • Best practices
    • 22. Tools to Manage Risk• Financial literacy programs• Improve retention• Enhanced institutional control measures
    • 23. Tools to Manage Risk• Increase financial aid counseling staff – Calls to former student borrowers/references – Letters/emails• Outsource outreach initiatives – Repayment education and assistance vs. CDR manipulation – Re-enrollment counseling/collaboration
    • 24. Contact InformationDennis Cariello, Chair, Higher Education Sector DLA Piper LLP 212.335.4816 Dennis.cariello@dlapiper.comJudith Witherspoon, Senior Vice President Edfinancial Services 865.342.5200 jwitherspoon@edfinancial.comJonathan Looney, Regional Director Edfinancial Services 706.410.0261 jlooney@edfinancial.com
    • 25. SourcesInside Higher Education – http://www.insidehighered.com/news/2011/05/23/student_loan_default_rates_rise_sharply_es pecially_for_for_profit_colleges – http://www.insidehighered.com/news/2011/04/14/tidewater_community_college_requiring_st udents_with_federal_loans_to_complete_personal_budget_and_repayment_planFinaid.org – http://www.finaid.org/educators/20100901gainfulemploymentimpactonpell.pdf – http://www.finaid.org/educators/20100507demographicdifferences.pdf New American Foundation – http://higheredwatch.newamerica.net/blogposts/2012/shape_up_or_ship_out_the_218_institu tions_that_must_develop_default_prevention_plans- http://edmoney.newamerica.net/blogposts/2012/3_year_student_loan_cohort_default_rates_r eveal_concerning_graduation_rate_trend-7220 Additional Sources – http://www.ihep.org/assets/files/publications/a-f/delinquency- the_untold_story_final_march_2011.pdf – http://www.finaid.org/educators/20100901gainfulemploymentimpactonpell.pdf – EverFi, ButtonwoodTM study, 2011