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U.S. Department of Education U.S. Department of Education Default Prevention Update Default Prevention Update

Michigan Default Aversion Symposium V

October 28, 2009

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National: Borrowers in DefaultNational: Borrowers in Default

2003 115,568

2004 144,128 (+24.7%)

2005 161,951 (+12.3%)

2006 204,507 (+26.4%)

2007 225,371 (+10.2%)

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National: Dollars in DefaultNational: Dollars in Default

• 2003 $647.7m

• 2004 $801m (+23.6%)

• 2005 $915m (+14.2%)

• 2006 $1.183b (+22.9%)

• 2007 $1.279b (+8.1%)

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Michigan: CDRMichigan: CDR

2004 4.2%

2005 4.0%

2006 4.3%

2007 5.8% (+34%)

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Michigan: Dollars in DefaultMichigan: Dollars in Default

FY 2004 FY2005 FY 2006 FY 2007

$22.7m $25.2m $31.3m $39.9m (27%)

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Michigan: Michigan: Borrowers in Default Borrowers in Default

FY 2004 FY2005 FY 2006 FY 2007

4,056 4,571 5,563 7,006 (25.9%)

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Default Prevention ChallengesDefault Prevention Challenges

• Increasing loan default in a changing landscape

• The Recession

• All Direct Loan environment

• The Golden Goose

• The Three-Year Calculation

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Default Prevention ChallengeDefault Prevention ChallengeVolume of Dollars in DefaultVolume of Dollars in Default

• Though not currently used to measure schools, the dollars in default impact the integrity of the student loan program and demand our attention!

• Big schools + big volume = big dollars in default

• Private loans = more debt for borrowers

• Accomplishment of Administration priorities depends in part on repayment of student loans.

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Default Prevention ChallengeDefault Prevention Challenge Rapidly Changing Landscape Rapidly Changing Landscape

• Loan default is increasing for all schools.

• Educational costs continue to rise.

• More students borrowing more money.

• Stafford + private loans = greater debt

• Schools require uninterrupted loan capital to operate, and higher default rates may result in access problems.

• Elevated default risk equals an increased risk to private loan capital.

• Changes to CDR calculation and sanctions.

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Default Prevention Challenge: RecessionDefault Prevention Challenge: Recession

• Default data is retrospective. The impact of the recession will be seen in FY08, FY09 and FY10 calculations.

• More borrowers are having difficulty repaying loans.

• More students are borrowing more money.

• The recession is (unfortunately) occurring concurrent with the change from a two-year to a three-year CDR calculation.

• More schools will experience compliance-level

difficulties in FY08, FY09 and FY10.

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Default Prevention Challenge:Default Prevention Challenge: New Servicing Partners New Servicing Partners

• Possible transition to all Direct Loan origination.

• FFELP schools will have new default prevention partner for DL, PUT and Conduit loans.

• Default prevention services still in design stage; resources, tools may be different from contractor to contractor.

• Stay tuned.

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Default Prevention ChallengeDefault Prevention Challenge Moving Beyond Default Rate Moving Beyond Default Rate

• The Golden Goose– Harvesting revenue from Stafford Loan Portfolio to

pay for Pell, other programs.– What will this mean for schools?

AND

• HR 3221 and grants to community colleges– Performance metrics– Tracking educational and employment outcomes

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Default Prevention ChallengeDefault Prevention Challenge Three-Year Calculation Three-Year Calculation

• Changes the CDR tracking window from 2 to 3 years.

• Creates a transition period (FY09 and FY10).

• Raises penalty threshold from 25 to 30%.– A new set of consequences, and – For some schools: a major headache

will arrive in September 2014 (FY11).

• Increases “disbursement relief” CDR to 15% (effective October 1, 2011).

2-Year Cohort Rate Monitored2-Year Cohort Rate Monitored

Cohort Year

Years Monitored

Official Rates Published

2-Year Sanctions

2007 2007, 2008 2009 Yes at 25%

2008 2008, 2009 2010 Yes at 25%

2009 2009, 2010 2011 Yes at 25%

2010 2010, 2011 2012 Yes at 25%

2011 2011, 2012 2013 Yes at 25%

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3-Year Cohort Rate Monitored 3-Year Cohort Rate Monitored

Cohort Year

Years Monitored

Official Rates Published

3-Year Sanctions

2009 2009, 2010, 2011

2012 No (Will receive 3-year calculation, but no sanction applies.)

2010 2010, 2011, 2012

2013 No (Will receive 3-year calculation, but no sanction applies.)

2011 2011, 2012, 2013

2014 Yes at 30%

2012 2012, 2013, 2014

2015 Yes at 30%

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Beginning with the 2011 CDR published September 2014, the following applies:– 1st year at 30% or more

• Default prevention plan and task force• Submit default prevention plan to ED

– 2nd consecutive year 30% or more• Review/revise default prevention plan• Submit revised plan to ED• ED may require additional steps to promote student

loan repayment– 3rd consecutive year 30% or more

• Loss of institutional eligibility for Pell, ACG/SMART and FFEL/DL

• School may appeal based on mitigating circumstances

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Three-Year Sanctions: The DetailsThree-Year Sanctions: The Details

Three-Year Cohort Default Rate Three-Year Cohort Default Rate

• Default prevention plan and default prevention task force required if the 3-year cohort default rate for FY 2011 (September 2014) and beyond is equal to or greater than 30%.

• Plan must be submitted to ED and must:– Identify the factors causing the default rate to exceed

the threshold– Establish measurable objectives and identify steps to

take to improve the institution’s rate– Specify actions the institution will take to improve

student loan repayment, including loan repayment counseling

– Does this sound familiar?18

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Default Prevention PlanDefault Prevention Plan

• Schools submit their default prevention plan to FSA for approval.

• FSA is required to provide technical assistance to promote improved student loan repayment.

• If the school exceeds the CDR threshold for second consecutive year, the default prevention task force must revise the plan and re-submit to FSA.

• FSA must review the revised plan and may require additional measurable steps to be taken by the school as part of the plan to promote student loan repayment.

CDR Disbursement WaiversCDR Disbursement Waivers

• New threshold: Schools with a default rate less than 15% for the three 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 until the borrower has completed the first 30 days of their program of study

Effective for loans first disbursed on or after October 1, 2011.

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The remaining slides describe in detail what schools should be doing to reduce default risk:

• Traditional financial aid office-based default prevention strategies…

• Non-traditional student success-based default prevention strategies…

• Schools should be using…and all DP plans should include…a combination of these two approaches.

Traditional vs Non-Traditional StrategiesTraditional vs Non-Traditional Strategies

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Traditional Approaches to Traditional Approaches to Successful Default Prevention Successful Default Prevention

• Primarily involves the Financial Aid Office

• Focus is on helping borrowers 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

• Requires effective contact information

– Leveraging the grace period

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Non-Traditional Approach:Non-Traditional Approach: Promoting Student Success Promoting Student Success

Driven by the fact that borrowers who do not complete are at high-risk of default

Involves administrators, faculty, staff Focus is on student success solutions that support the

borrower’s relationship to their education Goal is to increase student success, as successful

students are typically in the best position to repay their loans

Persistence, program completion, employment

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Non-Traditional Approach: Non-Traditional Approach: Promoting Student Success Promoting Student Success

• Student Success Solutions include:– Increasing program completion rates– Decreasing program completion time– Helping non-completers find a job– Collecting information while borrowers

are in school– and….?

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Non-Traditional Approach:Non-Traditional Approach: Promoting Student Success Promoting Student Success

– Investigate unique connections between loan default and student success at your school.

– Collect data:• Collect information about current students• Collect information about former students

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Take home message:Take home message:

• The rate, number of borrowers and number of dollars in default are increasing.

• Certain schools…with a two-year CDR (FY07) above 15% are at risk of compliance difficulties given the combination of recession and transition to the three-year calculation.

•To avoid the headache of developing a mandatory default prevention plan, or worse, facing ineligibility, at-risk schools need to take action now.

• Waiting until a second year (FY 2010) at or above 30% will be too late.

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Take home message:Take home message:

There are many things schools should do now to protect themselves and their student borrowers, including:

•Implementing traditional, financial aid-based strategies, and

•Implementing non-traditional student success-based strategies.

•Reach out to FSA Default Prevention staff and others for assistance.

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FSA Contact Information

Default Prevention

Mark Walsh 816-268-0412 mark.walsh@ed.govJohn Pierson 404-974-9315 john.pierson@ed.gov

Portfolio Performance Management(CDR calculations and data challenges)

Main Line: 202-377-4258Hotline: 202-377-4259Email: fsa.schools.default.management@ed.gov

Web: ifap.ed.gov/DefaultManagement/DefaultManagement.html