Default Management in the

US Student Loan Program

Tony Glad, Executive Vice President

ANZFAA – Sydney 2010

A high Cohort Default Rate can:

Result in a loss of eligibility for Title IV loans Possibly reduce school eligibility for other

sources of funding Affect disbursement policies Cause extra work to reduce default rate Cause students to reconsider attending an

institution

Default ConsequencesFor Schools

Loan default rates are on the rise Educational costs/student debt are rising The economy “New” three-year Cohort Default Rate (CDR)

calculations and sanctions “New servicers” - Guarantors and FFELP

lenders are no longer strong players

The Challenges Ahead

1990 (22.4%

)

1995 (10.4%

)

2000 (5.9%)

2003 (4.5%)

2006 (5.2%)

2007 (6.7%)

0

5

10

15

20

25

Default Rate

Default Rate

Cohort Default Rate History

FY 2003 FY 2004 FY 2005 FY 2006 FY 2007

115,568 144,128 161,951 204,507 225,271

+24.7% +12.3% +26.4% +10.2%

Borrowers in Default

FY 2005 FY 2006 FY 2007

School Type

DefaultRate

# DefaultBorrowers

DefaultRate

# DefaultBorrowers

DefaultRate

# DefaultBorrowers

Public 4.3% 78,040 4.7% 94,627 5.9% 102,919

Private 2.4% 23,411 2.5% 26,735 3.7% 29,558

Proprietary 8.2% 60,379 9.7% 82,995 11.0% 92,731

Foreign 1.0% 121 1.2% 150 2.2% 163

Total 4.6% 161,951 5.2% 204,507 6.7% 225,371

Good NewsNon US Schools have lower default rates

Cohort Default Rate data is retrospective, and latest published figures are from 2007

US economy started to decline in 2008

Unemployment began to increase

Interest rates on Stafford and PLUS locked in at 6.8% and 8.5% (July 1,2006)mean higher monthly payments than early 2000’s

But Remember…That Economy Thing

The Higher Education Opportunity Act of 2008 expands the cohort default rate window from 2 years to 3 years.

Essentially, borrowers have a longer period in which their defaulting can affect their school’s default rate.

Would take foreign schools from 2007 CDR 2.12% to 3.61%.

Curious about you? www.finaid.org/loans/cohortdefaultrates.phtml

CDR Window Expanding

Three year rates won’t go into full effect until FY2011’s data is available, so sanctions based on this won’t go into effect until FY2014

New sanction levels-3 years at 30% (up from 25%) lead to ineligibility15% (up from 10%) for 30 day delay

for 1st yr and multiple disbursement rules

CDR Window Expanding – ctd.

First year>30% School must develop a default prevention plan and task forceSubmit plan to ED

Second consecutive year> 30%School must review/revise planSubmit revised plan to EDED may require additional efforts

Third consecutive year> 30% Loss of eligibility

Three Year Sanctions

Guarantee agencies and FFELP lenders now out of the picture

Reporting of student loan amounts, revisions, refunds and cancellations must be done by school via NSLDS◦ A return of funds to G5 is not automatically

reported; school must do so via COD and NSLDS

Increased School Responsibility

Servicer NSLDS Code

Borrower phone

School Phone

Website

ACS 700577 800-508-1378 866-938-4750 www.ed-servicing.com

Great Lakes 700581 800-236-4300 888-686-6919 www.mygreatlakes.org

Nelnet 700580 888-486-4722 866-463-5683 www.nelnet.com

PHEAA 700579 800-699-2908 800-655-3813 www.mtfedloan.org

Sallie Mae 700578 800-722-1300 888-272-4665 www.salliemae.com

DL Servicers

Multiple servicers used to create an environment of competition to ensure student borrowers receive the best in business service

All of a borrower’s loans should be at one servicer

School may not designate a servicer

Loan volume will be allocated based on default management performance and customer

Satisfaction surveys (borrower, school, ED)

DL Servicers

Counseling strategy

Data collection

Data reporting

Contact with student

Key Steps to Effective Default Prevention

Solid counseling program using Entrance Counseling◦ Required for all first time borrowers in the Federal

programs◦ Can be an institutional requirement for all

borrowers

Should be done before student arrives and funds disbursed

Entrance Counseling

Studentloans.gov◦ Links in with Direct Loan system

Mapping your future◦ Same process many have been using◦ Verifying if still allowed for foreign schools

In person presentation Stronger impact and more dynamic interaction

Entrance Counseling

Must be made available to all students when they graduate or cease to be enrolled at least half-time

Harder to enforce than Entrance Counseling◦ What things have you done?

If student doesn’t attend need to follow up

Exit Counseling

Studentloans.gov◦ Links in with Direct Loan system

Mapping Your Future◦ Same process many have been using◦ Still exists – for now

In person presentation Stronger impact and more dynamic interaction

Exit Counseling Option

What must you do if a student doesn’t do Exit Counseling before leaving your university?

Either: Ensure that borrower completes

interactive electronic counseling, Mail written materials to the borrower at

their last known address within 30 days after learning they withdrew or failed to complete exit counseling.

Missed Exit Counseling?

It is important to maintain current records showing the students ◦ Mailing Address◦ Phone Numbers◦ Other contact information

Will be used by servicers chasing the student during delinquency (before a student defaults)

Data Collection

Keep NSLDS up-to-date with all enrollment data

Easier now there is only one lender, but university now bears full responsibility for reporting – no lender or guarantor will do it on your behalf

Keeping servicer informed when student withdraws◦ Let them know within 30 days if student leaves before

expected completion date

Data Reporting

Students are always more likely to want to stay in touch with the university rather than a lender

Maintaining an alumni connection is often best way to make sure you have contact details

Contact with students