managing student debt, delinquency, and default

Confidential and proprietary information © 2012 Sallie Mae, Inc. All rights reserved.

Eric K. Johnson

MANAGING STUDENT DEBT, DELINQUENCY, AND DEFAULT VASFAA Annual Conference

MAY 22, 2012


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► Current market conditions

► Cohort default rate (CDR) overview

► Gainful employment (GE) loan repayment rate (LRR) overview

► Non-CDR performance metrics

► Best practices to manage education loan debt, delinquency, and default

Topics


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► Transition from FFELP to FDLP (ED-servicing)– Elimination of guarantors’ default aversion and financial literacy efforts– Palpable student borrower confusion over “split-servicing”

► Greater regulatory scrutiny and legislative considerations– 3-year CDRs and the publishing of “trial” rates– Higher Education Act of 2008: “…life of cohort default rates…”– Gainful employment (GE) regulation and loan repayment rate (LRR) metric– 90/10 ratio considerations– Consumer Financial Protection Bureau (CFPB) oversight

► New student borrower risk profile– Unprecedented levels of average student-borrower indebtedness (ABI)

• Proliferation of private credit borrowing and other consumer debt– Distance and online learning has created a more “transient” student

Current Market Conditions


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Student-Loan Debt Reaches Record $1 Trillion, Report SaysBy Janet Lorin U.S. student-loan debt reached the $1 trillion mark, as young borrowers struggle to keep up with soaring tuition costs, according to the initial findings of a government study. The figure, which is higher than the country’s credit-card debt, was probably reached “several months ago,” Rohit Chopra of the Consumer Financial Protection Bureau, said in a posting yesterday, excerpted from a speech he made at the Consumer Bankers Association meeting in Austin, Texas.

“…Federal student-loan debt isn’t growing just with new originations,” he said. “With so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school…”

Bloomberg Article – March 22, 2012


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► Undergraduate Students– Average student loan debt for 4-year undergraduate students was $23,186– Average student debt of those applying for federal student aid was $24,651– >86% of 4-year undergrad student applying for federal student aid

borrowed money to attend college• 25% borrowed >$30,500• 10% borrowed >$44,600

► Graduate Students– Median increment debt:

• Master’s Degree: $25,000• Doctoral Degree: $52,000• Professional Degree: $79,800

Student Loan Debt

Source: http://www.finaid.org and http://nces.ed.gov based on AY 2007-2008 data

http://www.finaid.org/

http://nces.ed.gov/


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Cohort Default Rate (CDR)Overview

Student Outreach Solutions


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For each school (FY2012 example):

# of student borrowers who entered default in FY2012, FY2013, and FY2014 # of student borrowers who entered repayment in FY2012

=

FY 2012 Cohort Default Rate (x.x%)

NOTE: Federal fiscal year (FY) = October 1 to September 30

Cohort Default Rate (CDR) Formula


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► CDR is the percentage of a school’s student borrowers (with Stafford, SLS, and select consolidation loans) who enter repayment and default by the end of the next two (2) federal fiscal years

► A key performance indicator (KPI) relating to a school’s default aversion and student preparedness efforts

► “Draft” CDRs are released to individual schools in February– A school can issue a formal “challenge” in an attempt to reduce its CDR by illustrating

data errors• Data errors can be a result of inaccurate repayment start dates, incorrectly-reported defaults

and/or student-borrower “dispositions”• Servicer due diligence violations• Abbreviated grace period

► “Final” CDRs are published nationally each September– “Trial” 3-year CDRs are published as well

Cohort Default Rate (CDR)


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► Schools with CDRs of 15% (formerly 10% under the 2-year formula) or less are eligible to receive special benefits from the U.S. Department of Education (ED) such as:– Regulatory relief

• Single disbursements within a semester• Loan delivery to first-year students before the 30-day window

– Other benefits • The former “school-as-lender” option was only available to

schools that recorded favorable CDRs– Other ED-awarded benefits will likely use similar CDR-related criteria

Benefits of Favorable CDRs


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► Loss of Title IV eligibility (accessibility to federal student aid)– For schools that post CDRs of 30% or more for three (3)

consecutive years• Formerly 25% under the 2-year CDR formula

– For schools that record a CDR of 40% for one (1) year

► Possible loss of potential students (and revenue)

► Reputational and headline risk

► Risk of losing access to private loan capital– Eligibility and funding limits

Consequences of Unfavorable CDRs


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Historical Student Loan Default Rates (Source: ED)


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CDRs (2-year formula) By Institution Type

FY 2007 FY 2008 FY 2009Institution Type

# of Schools

Borrower Default

Rate

# of Borrowers Defaulted

# of Borrowers Entered

Repayment# of

Schools

Borrower Default

Rate


# of Borrowers

Entered Repayment

# of Schools

Borrower Default

Rate


# of Borrowers Entered

RepaymentPublic 1,614 5.9% 102,919 1,721,629 1,618 6.0% 104,292 1,720,664 1,627 7.2% 128,121 1,778,903Less than 2 yrs 144 7.5% 595 7,832 145 6.7% 523 7,736 142 9.9% 749 7,548

2-3 yrs 846 9.9% 48,287 483,721 848 10.1% 49,331 487,436 855 11.9% 62,234 520,256

4yrs(+) 624 4.3% 54,037 1,230,076 625 4.4% 54,438 1,225,492 630 5.2% 65,138 1,251,099

Private 1,718 3.7% 29,558 778,296 1,702 4.0% 30,620 761,129 1,706 4.6% 38,718 825,221

Less than 2 yrs 46 12.6% 449 3,538 45 14.1% 537 3,794 43 14.5% 605 4,148

2-3 yrs 188 8.1% 1,204 14,798 180 8.2% 1,167 14,157 172 10.0% 1,507 15,039

4yrs(+) 1,484 3.6% 27,905 759,960 1,477 3.8% 28,916 743,178 1,491 4.5% 36,606 806,034

Proprietary 2,008 11.0% 92,731 838,328 2,118 11.6% 103,764 889,034 2,147 15.0% 152,862 1,015,855

Less than 2 yrs 1,039 12.0% 15,603 129,627 1,105 12.4% 15,418 123,454 1,110 13.7% 18,031 130,936

2-3 yrs 702 12.5% 33,030 262,640 723 12.6% 34,538 272,215 732 14.8% 42,893 289,546

4 yrs(+) 267 9.8% 44,098 446,061 290 10.9% 53,808 493,365 305 15.4% 91,938 595,373

Foreign 435 2.2% 163 7,276 421 2.2% 176 7,902 425 5.5% 493 8,862

Unclassified 1 0.0% 0 5 1 0.0% 0 5 1 0.0% 0 5

Total 5,776 6.7% 225,371 3,345,534 5,860 7.0% 238,852 3,378,734 5,906 8.8% 320,194 3,628,846


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2- to 3-year CDR Analysis (Source: BridgeSpan Financial/ACS)


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Gainful Employment Loan Repayment Rate (LRR)Overview



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Loan Repayment Rate (LRR) Formula


Payments-Made Loan (PML) + Loans Paid in Full (LPF) ($) during FY2012Original Outstanding Principal Balance (OOPB) ($) of loans from Student

Borrowers who entered repayment in FY2008 and FY2009

=

FY 2012 Loan Repayment Rate (x.x%)

NOTE: Federal fiscal year (FY) = October 1 to September 30


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► For private-sector schools and all certificate programs

► Loan repayment rate (LRR) is a new key performance indicator that ED designed to complement CDR – Arguably the easiest GE metric to positively influence– Introduced in 2011 to motivate successful repayment of student loans– LRR is based on dollars ($); whereas, CDR is based on number (#) of

student borrowers– Certain repayment options like deferment (on unsubsidized loans) and

forbearance can simultaneously help a school’s CDR and impair its LRR

► Schools can exhibit gainful employment in one (1) of three (3) ways:– Loan repayment rate (LRR) must be = to or > than 35%– Debt-to-income ratio must be = to or <12%– Debt-to-discretionary income ratio must be = to or <30%

Gainful Employment (GE)


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► LRR is demonstrated when student borrower’s:– Loan balance (P&I) is reduced by at least $1.00 over the fiscal year – Loan is paid-in-full – Loan is on track to being forgiven due to public-service employment

• Making payments under an interest‐only or income‐based repayment plan (IBR) (subject to the 3% cap/anti‐abuse limit)

• In a graduate program and his or her loan is a consolidation loan and all interest accrued over the course of the year has been paid

► LRR measures student borrowers in the third and fourth years of repayment with two (2) exceptions: – If there are 30 or fewer borrowers

• In this 2‐year period, the period is expanded to include student borrowers in the third, fourth, fifth, and sixth years or if there are still 30 or fewer student borrowers

• In this 4‐year period, the program is considered to pass the measure– If the program is a medical or dental program

• It only includes student borrowers in their sixth and seventh years to accommodate typical internship and residency periods

► Institutions can correct LRR data using a process similar to one used to challenge CDRs

Loan Repayment Rate (LRR)


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Loan Repayment Rates (LRR) Critical Dates

Released by U.S. Department of Education (ED) Early 2015

Measures repayment activity during FY2014

Student borrowers who enter repayment during FY2010 and FY2011

Programs with small amount of students FY2008, FY2009, FY2010, and FY2011

Medical and dental programs FY 2007 and FY2008

Critical Dates Relating to Loan Repayment Rate (FY2014 Example)


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► 90/10 Rule– Private-sector colleges can derive no more than

90% of revenues from federal sources (ED)• GI Bill and Department of Defense (DoD) Tuition

Assistance are part of the 10% portion• Durbin proposal intends to raise to an 85/15 ratio and

eliminate the so-called “DoD loophole”– Effective July 2012, the 10% will be determined on

actual loan payments (cash accounting) instead of using the net present value (NPV)

Other Regulatory Considerations


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Default- and Repayment-OptimizationBest Practices



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STUDENT OUTREACH SOLUTIONS

DEFAULT

Delinquency Default

Guarantor Default Aversion Services

School’s Default- and Repayment-Management Effort

1-60 days 61-150 days

271-420 days

151-270 days Collections

DAAR* Filed

Default claimfiled between

day-270-360

Default claimpurchased @

~45 days post-claim

FFELP-Loan Servicing

STUDENT BORROWER DELINQUENCY TIMELINE (FFELP)

Grace(180 days)


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Delinquency Default

Grace(180 days) 1-60 days 61-150

days271-360

days151-270

days Collections

Default @ day-360

STUDENT BORROWER DELINQUENCY TIMELINE (ED)

ED-Loan Servicing

DEFAULT

School’s Default- and Repayment-Management Effort


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Sample Workflow


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Delinquency Resolution Sequence


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► Encourage responsible borrowing – Entrance counseling, enrollment, and post-enrollment

► Establish frequent and ongoing communication; continuously update demographic information at critical time periods– Enrollment, post-enrollment, grace, graduation/separation, repayment

► Develop formal debt management plan and outreach program– Performed internally and/or in collaboration with a third-party vendor– Leverage each organization’s strengths

► Determine “at-risk” student borrower population– Prioritize work load for most strategic resource deployment

Best Practices


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Data Flowchart

Default- and Repayment-Management

Team


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► In-school status– Program-of-study – First in family to attend college– Pell Grant Recipient– No transferrable previous education credit

► Repayment status– Withdrawal status– Presence or absence of valid demographic data to determine skip-trace status – Account balance

• Note: highest balances do not necessarily translate into the highest default risk

► Delinquency status

Student Borrower Risk Factors (examples for illustrative purposes only)


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► Compose telephone scripts/narratives – Embrace a warm and friendly tone; however, use open-ended questions (how

much, when, etc.)– Verify demographic information on each contact– Promote balance-reducing payments and electronic debit account enrollment for

student borrowers who are able to pay– Offer deferment entitlements and forbearance for student borrowers who are

unable to pay– Facilitate 3-way conference calls with loan servicers (for pay-by-phone

transactions and verbally- approved forbearance requests)

► Launch automated and/or manual dialing campaigns – Prioritize work load (e.g., sorted by fiscal year vintage, delinquency, risk

exposure) – Provide multiple ways for the student borrower to make inbound contact (toll-free

hotline, E-mail, website, etc.) – Consider interactive (attended or unattended) messaging– SMS Texting

Telephonic Outreach


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Sample Operational Flow Chart


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► Lettered Outreach– Craft a letters series (to be delivered via E- and direct-mail) for outreach during

various stages of engagement• Welcome letter• Dunning notices (past due)• Late-stage delinquency letter (quote default consequences)

► Skip-tracing– Contact previously-known telephone numbers and addresses– Use third-party vendor either on a “pay-per-inquiry” or “batch” basis to source new

student borrower demographic information

► Evaluate and report performance– Activity-based metrics: telephone right party contacts (RPCs), E-mail open- and

click-through-rates; letters sent, skip-trace activities performed– Results-based metrics: resolutions (# and $), skip-trace locates, payment

resolutions; delineation of resolution methods, CDR, LRR

Operational Best Practices


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Eric K. JohnsonPresident, Student Outreach Solutions, Inc.Sallie Mae11100 USA Parkway, Fishers, Indiana 46037317.348.9119 (t) | 317.450.7063(c)[email protected]

Thank You For Your Time

mailto:[email protected]

managing student debt, delinquency, and default

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