Risk Management and Student Loan Default

Cohort Default Rate

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 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

Changes to the Cohort Default Rate

Loss of eligibility threshold occurs with CDR over 25% for three previous years

Loss of eligibility threshold occurs with CDR over 30% for three previous years

9/30/1310/1/10 9/30/12

New 3-Year Cohort Default Rate Formula FY 2011

9/30/11

2-Year Cohort Default Rate Formula FY 2011

10/1/2010 to 9/30/2013

10/1/2010 to 9/30/2011

10/1/2010 to 9/30/2012

10/1/2010 to 9/30/2011

Cohort Default Rate Date Range

Note: Students entering repayment today will be part of your 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%)

School 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

School 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

3-Year CDR - published 2012

3 consecutive years with official CDRs of 30% or greater

School would lose eligibility to participate in:

• Pell Grant• Federal Direct Loans

Corrective Action and Sanctions

The US DOE recently stated that schools can expect CDRs to increase by over 80% under the new 3-Year calculation.

1%1% 2% 3%

5%

7%

13%

27%

41%

Public, 4-year

Private, Less-than-2-year

Public, Less-than-2-year

Private, 2-year

For-Profit, 4-year

Private, 4-year

Public, 2-year

For-Profit, 2-year

For-Profit, Less-than-2-year

Corrective Action and Sanctions

Source : Rachel Fishman, Higher Ed Watch, “Shape Up or Lose Out: The 218 Institutions that Must Develop Default Prevention Plans”, 2012.

For the 2009 3-Year CDR calculation, 218 schools exceeded the 30% threshold

Risk Management

Why 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.

Default Rate History

After Dip, Loan-Default Rates Climb to Highest Rate Since 1997

Source : U.S. Department of Education

Comparison of FY 2010 Official National 2-Year Rates to Prior Three Years

Public Institution Comparison

2007 2008 2009 20100%

2%

4%

6%

8%

10%

12%

14%

16%

Less than 2 years

2 - 3 years

All schools - na-tional average

Source : U.S. Department of Education

School Classification

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.

Student Loan Risk Management

Why now?• Economic slump

• Split servicing and PUT loans

• Graduate underemployment

• Transition to 3-Year Cohort Default Rate (CDR)

At-Risk Borrowers

Average Loan Repayment Rates College Type < 10% Pell Grant Recipients > 66% Pell Grant Recipients Public 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 Pell Grant Recipients”, 2010.

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

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

Financial Attitudes & Behaviors Across the States

Source : EverFi, ButtonwoodTM study, 2011.

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

Action Plan Options

1) Change enrollment policies?

Source : Jennifer Cohen Kabaker, Ed Money Watch, “3-Year Student Loan Cohort Default Rates Reveal Concerning Graduation Rate Trend”, 2012.

Action Plan Options

Community College % Change in FTE Enrollment

School A -2.4%School B -5.4%School C -4.6%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

2) Eliminate student loan program participation?

3) Appeal CDR sanctions?

• Grounds for appeals• Resource waste• Management time• Not guaranteed• Does not help students

Action Plan Options

Action Plan Options

4) Develop default management plan and devote resources to manage risk?

• Default management task force• Create plan• Best practices

Tools to Manage Risk

• Financial literacy programs

• Improve retention

• Enhanced institutional control measures

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

Dennis Cariello, Chair, Higher Education SectorDLA Piper LLP212.335.4816Dennis.cariello@dlapiper.com

Judith Witherspoon, Senior Vice PresidentEdfinancial Services865.342.5200jwitherspoon@edfinancial.com

Jonathan Looney, Regional DirectorEdfinancial Services706.410.0261jlooney@edfinancial.com

Contact Information

Sources

Inside Higher Education– http://www.insidehighered.com/news/2011/05/23/

student_loan_default_rates_rise_sharply_especially_for_for_profit_colleges– http://www.insidehighered.com/news/2011/04/14/

tidewater_community_college_requiring_students_with_federal_loans_to_complete_personal_budget_and_repayment_plan

Finaid.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_institutions_that_must_develop_default_prevention_plans-http://edmoney.newamerica.net/blogposts/2012/3_year_student_loan_cohort_default_rates_reveal_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