Loan Default Prevention

1. Loan Default Prevention Tony D. Carter Director of Student Financial Aid UNC Charlotte

2. Cohort Default Rate (CDR) The percentage of a school’s federal student loan borrowers who enter repayment within the cohort fiscal year (denominator) and default (numerator) within the cohort default period # who default ----------------------------------------------------------------------------------------------- # who enter repayment = CDR

3. Recent data shows 25% increase in CDRs FY10 CDR is 9.1%

4. 2010 CDRs by Sector Public school rates increased from 7.2% to 8.3% (15.3% increase) Private school rates increased from 4.6% to 5.2% (13% increase) For-profit school rates decreasedfrom 15% to 12.9% (1st time in 4 years)

5. Why the Increase? Hard economic times - more difficult for students to repay their loans Borrowers struggling with unemployment in a weak economy Increased enrollment in for-profit schools where default rates are higher (47% of defaulters although they enroll only 13% of students) Financial aid offices struggling with record workloads and new regulatory requirements – leaves fewer resources for critical one-on-one counseling

6. Default Prevention Challenges Increasing loan default in a changing landscape The consequences of loan default The recession The dollars in default The “new” 3-year cohort default rate calculation

7. The Changing Landscape Loan defaults increasing for most schools Educational costs continue to rise More students borrowing more money Combination of Direct Loans and private loans equal greater debt Changes to CDR calculation accompanied by new sanctions

8. The Consequences of Default Not only does student loan default impact the integrity of the student loan programs, but there are significant consequences for: • Taxpayers • Schools • Borrowers

9. The Consequences of Default For the borrower Damaged credit report (7 years minimum) Higher interest rates for years Wage garnishment Seizure of federal and state tax refunds Legal action in a federal district court Title IV ineligible No mortgage loans Others

10. The Consequences of Default For the school – The CDR is a measure of administrative capability. High CDRs may: Result in adverse publicity Negatively reflect on school quality Result in loss of Title IV eligibility Threaten continued access to both DL and private loan funds Result in extra work to reverse high rates

11. The Recession CDR default data is retrospective, so the impact of the recession is seen in FY 08, FY 09, and FY 10 CDR calculations More borrowers are having difficulty repaying their loans The recession is occurring concurrent with the change from a 2-year to a 3-year CDR calculation Some schools may face compliance difficulties due to CDRs in the coming years

12. National – Borrowers in Default & Annual Percentage In FY10, approximately 375,000 student borrowers defaulted – 325% increase in 7 years!

13. The Dollars in Default The volume of dollars in default is not currently used to measure schools, however, it impacts the integrity of the student loan program Big schools + Big volume = Big Dollars in Default Private loans = more debt for borrowers Accomplishment of the President’s education priorities depend in part on repayment of student loans

14. National – Dollars in Default & Annual Percentage

15. The 3-Year CDR Calculation Expands the default tracking window from a 2-year period to a 3-year period Creates a transition period (FY09/10/11) Raises penalty threshold from 25% to 30% with a new set of consequences and a possible compliance issue in September 2014 (FY 2011 CDR) Increase availability of “disbursement relief” from 10% to 15%

16. 2 to 3-Year CDR Scenario • Numerator = # of borrowers from the denominator who default within a FY • Denominator = # of borrowers who enter repayment within a FY FY-09 FY-10 FY-09 FY-10 FY-11 355 5000 = .071 or 7.1% Released Sept 2011 605 5000 = .121 or 12.1% Released Sept 2012 125 230 5,000 125 230 250 5,000

17. 3-Year CDR Sanctions Beginning with the 2011 CDR (published in September 2014), schools with CDRs of 30% or higher must take certain corrective actions: Create a Default Prevention Team Submit a Default Prevention Plan to FSA for review

18. 3-Year Sanctions – The Details First Year at 30% or more Default Prevention Plan and Task Force Submit Plan to FSA for review Second consecutive year at 30% or more Review/revise Default Prevention Plan Submit Revised Plan to FSA FSA may require additional steps to promote student loan repayment Third Year at 30% or more Loss of Eligibility for Pell/DL School has appeal rights due to extenuating circumstances

19. CDR Disbursement Waivers New threshold: Schools with a default rate less than 15% for the 3 most recent fiscal years: May disburse a single term loan in a single installment, and Need not delay the first disbursement to a first-year undergraduate borrower for 30 days

20. Traditional Default Prevention Strategies Primarily involves the financial aid office and focuses on helping borrowers to develop a healthy relationship with their loans to include: Understanding loan repayment Teaching financial literacy Updating enrollment status changes Reaching out when help is needed

21. Entrance Loan Counseling Provide information which includes: Job opportunities & salary information Estimated monthly loan payment Providing loan servicer contact information Obtaining good borrower contact information “Self-help” via NSLDS for Students Counsel students against returning to school only to avoid entering repayment on existing loans

22. Financial Literacy Correlation exists between increased financial literacy and decreased defaults Schools can play an important roles Make it part of your first year curriculum Offer a class for credit if possible Consider on-line financial literacy programs

23. Financial Literacy & Private Loans May still spell trouble for student borrowers, especially when Federal Student Loans are not their first choice. 1 in 4 private loan borrowers in 2007-2008 did not take out federal loans 91% of private loan borrowers at community colleges in 2007-08 did not exhaust federal student aid first Volume is decreasing and the Secretary now has some authority over them

24. Protecting the Grace Period Of the borrowers who defaulted, 91% did not receive their full 6-month grace period due to late or inaccurate enrollment notification by the school. Schools must learn when a borrower leaves campus and promptly report this to NSLDS. Why is this so important?

25. Servicer Repayment Counseling During the grace period your Loan Servicer does the following: Establishes a relationship with the borrower Ensures the correct repayment status Discusses the appropriate repayment plan Promotes on-line self-service Updates and enhances borrower contact information Discusses consolidation options

26. Assist Borrowers in Repayment Request delinquency reports from your DL servicer Review updated contact information Contact the delinquent borrowers The DL servicers and/or FSA Default Prevention can help prepare your staff

27. Points to Remember The rate, number of borrowers, and dollars in default are increasing The combination of the recession and the new 3-year CDR calculation will cause rates to increase Schools should examine their CDR history and assess their risk for exceeding thresholds Take positive steps to reduce defaults on your campus

28. Loan Default Prevention Questions?