Credit for Credits: The Tenuous Balance Between Retention Rates & Cash Flow

1. Transworld Systems White Paper
Credit for Credits: The Tenuous
Balance Between Retention Rates &
Cash Flow
April 2010
Introduction

2. Transworld Systems White Paper – Credit for Credits: The Tenuous Balance Between Retention
Rates & Cash Flow
Introduction
Caught between falling retention rates and rising delinquency rates, higher learning
institutions must balance enrollment goals, retention rates and cash flow to avoid
jeopardizing the institution’s financial well-being. This paper explores several ways higher
learning institutions can improve cash flow without compromising retention rates.
A double-edged sword
The cost of higher education in the U.S. continues to soar beyond inflation rates and so too
does the cost to finance higher education. With less government aid in the form of grants,
an increasing number of students and parents are turning to loans to finance education.
However, an institution’s retention rate determines, in part, the amount of government aid
the institution will be granted. Students, who have maxed out their financing options and
can no longer pay tuition and related educational expenses, often drop out. Therefore
higher learning institutions, in an attempt to preserve retention rates, will extend credit to
students, who have already incurred debt and represent a higher risk loan proposition.
Preventing accounts receivable backlog
Like any other asset, accounts receivable must be properly managed. How will the asset
be used? What policies will guide proper use of the asset? Do such policies exist or do
they need to be created? These are a few of the questions that must be addressed to
ensure that accounts receivable are effectively managed and the debt collected.
Studies show that a proactive approach to accounts receivable can improve cash flow and
greatly reduce uncollectible accounts. Best practices suggest the following:
1. Document debt—Any credit that is extended must be documented in order to collect
on it at a later date.
2. Have students acknowledge the debt.
3. Notify the student in writing when the debt is due.
4. Send past due notices before the debt ages beyond 60 days.
5. Leverage record holds and other service denials to collect past due balances.
6. Share past due accounts with instructors, who may be able to encourage the
student to make a payment or seek assistance from a financial aid officer.
7. Provide payment plan options and follow up.
8. Assess late fees and ensure students are aware of the fees up front.
Best practices suggest communication plays an important role in preventing accounts
receivable backlog. Policies should be established that guide the process of accepting
credit and assessing late fees as well as when to invoke the collection sequence e.g.,
invoice, statement, phone call, written notice of outstanding balance, second notice,
service holds, etc.
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3. Transworld Systems White Paper – Credit for Credits: The Tenuous Balance Between Retention
Rates & Cash Flow
It is important to continue communicating with students who have credit balances to help
increase the probability of collecting the balance without involving conventional collection
agencies. Sending invoices, acknowledgements and statements on a regular basis can
help avoid turning over accounts to collection agencies. Given the transitory nature of
college students, every communication should provide an opportunity for students to
update their contact information.
Reducing uncollectible accounts
One of the most effective ways to reduce uncollectable balances is to first understand the
current situation. Evaluate the effectiveness of current accounts receivable practices and
establish a baseline for key metrics such as:
 Overall collection effectiveness (total outstanding balances/total billed)
 Total annual write-offs
 Aging comparison year-over-year
 Number of collection calls
 Number of late fees assessed
Once the current situation is established, benchmark current metrics against industry
norms and create an improvement plan. Collection efforts early on in the aging process
have been proven to improve overall collection effectiveness. However, given the high
volume of activity that most business offices experience during the enrollment process and
ensuing enrollment modification process, resources for early collection intervention are
extremely limited. Therefore, numerous higher learning institutions outsource early
collection activity. The following section discusses options for collecting past due
accounts.
Collecting delinquent accounts without jeopardizing retention
As noted previously, early action in collecting past due accounts is critical to the success of
collection efforts. Higher learning institutions have a greater challenge with early
intervention in that early intervention coincides with one of the business office’s busiest
periods. By the time the flurry of registration and change activities subside, many of the
accounts have lapsed into aging. Additionally, higher learning institutions that accept Title
IV funding must be cognizant of the timing for invoking collection procedures so as not to
alarm the student into dropping out of school prematurely.
It is recommended that collections procedures be invoked after the student has passed the
60% mark for earning hours or credits—the point at which the institution will not have to
repay Tile IV funds should the student decide to drop out of school. However, considering
the business office’s limited resources, often student accounts lapse into the 120-day to
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4. Transworld Systems White Paper – Credit for Credits: The Tenuous Balance Between Retention
Rates & Cash Flow
one-year aging, at which time the account is turned over to a percentage-based collection
agency. This represents a “lose-lose” situation for the learning institution and the student.
The learning institution only has an estimated 14 percent1 probability of collecting the
balance (30 percent to 50 percent of which is paid in fees to the collection agency), and
the institution has lost a student who is not likely to return because of a looming past due
balance.
Outsourcing collections to a flat fee-based agency presents several opportunities for
higher learning institutions to encourage student enrollment and preserve cash flow and
retention rate. Such agencies become involved early in the collection process, which
optimizes business office resources by enabling the business office staff to oversee the
accounts receivable process while maintaining daily workflow. Third-party resources
communicate diplomatically with students in a timed sequence that coincides with key
dates, such as the one described in the previous paragraph and supports compliance with
the institution’s collection policies and local and federal regulations. Studies show2 that
with early diplomatic action, students are more likely to pay an outstanding balance, which
can ensure retention. Although the student’s financial situation may prevent enrollment for
a temporary period, the student, having a cleared balance, is likely to return to the same
institution at a later date.
1
Average recovery rate according to American Collectors Association
2
U.S. Department of Commerce.
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5. Transworld Systems White Paper – Credit for Credits: The Tenuous Balance Between Retention
Rates & Cash Flow
Additionally, for institutions receiving Title IV assistance, outsourcing can streamline and
simplify the preparation required for an audit. An outsourced provider’s detailed reporting
of student account activity can validate the institution’s records and prove compliance with
government policies.
The financial benefits of outsourcing
Each institution must conduct due diligence to determine the financial benefit of
outsourcing. However, general data for the education sector suggests that outsourcing to
a flat fee-based agency, such as Transworld Systems, provides a more robust collection
effort than that of an institution’s already constrained resources. Such efforts early in the
account aging process substantially increase the amount collected when compared to the
process of turning over 120-day and older accounts to a percentage-based agency.
Institutions must select between an upfront investment that yields a significantly greater
financial return, improved retention rate and a reduction in total overall cost of collections
or a pay-per-collection method that yields a significantly lower return, risks retention and
requires a higher cost-per-collection fee. The aforementioned financial investment in
outsourcing considers only the cost of collecting the unpaid balance. Added value from
optimizing existing business office resources and processes can also be factored in and
would vary depending on the institution’s cost structure, size and financial outlook.
Conclusion
Higher learning institutions seeking to maintain the tenuous balance between enrollment,
retention and cash flow must establish effective policies and processes for managing the
accounts receivable asset. Effectively managing accounts receivable involves making
prudent investment decisions on where and at what point in the collections process to
invest in order to yield the highest rate of return while meeting cost, retention and
enrollment goals. Outsourcing collections can assist in this area by helping the institution’s
business decision-makers optimize constrained resources while providing the early action
required to increase cash flow without jeopardizing retention rates.
About Transworld Systems Inc.
Transworld Systems Inc. ®, a wholly owned subsidiary of NCO Group, Inc.®, is an industry
leader in profit recovery with headquarters in Santa Rosa, CA, and more than 100 offices
throughout the United States and Puerto Rico. Transworld and its service brand
GreenFlagSM Profit Recovery are redefining the collection industry by providing businesses
and medical organizations with better tools for recovering bad debt and past due accounts.
Transworld has collected $2.4 billion over the past 5 years for more than 60,000 clients. In
addition, Transworld Systems specializes in the education market throughout the United
States and has recovered $279 Million for our education clients. For more information, call
1.888.446.4733 or visit www.transworldsystems.com.
© 2010 Transworld Systems Inc. 5