Cohort Default Rate Trends: Potential Risks and Proactive Planning ­ News ­ Champion College Services

Cohort Default Rate Trends: Potential Risks and Proactive Planning

“Cohort Default Rate Trends: Potential Risks & Proactive Planning”

By Mary Lyn Hammer

President and CEO, Champion College Services

Career Education Review

October 8, 2011

 

The U.S. Department of Education released the Official FY 2009 2-year Cohort Default Rates on September 12, 2011.  Not surprising, the rates had increased significantly in every sector of higher education.  The continuing bad economy coupled with challenges from the transition from FFELP to Direct lending are having a definite adverse affect on the cohort default rate trends. 

 

Data also showed that public and proprietary schools flip their position in ranking for percent of increase between the FFELP and Direct Loan Programs.  The Direct Loan Data shows that the public sector percent of increase was over three times as high as that of the proprietary sector.

 

The significant difference between the data in the Direct and FFELP Loan Programs is most likely caused by the transition from FFELP to Direct Loan lending.  Many FFELP lenders and servicers quickly exited the student loan industry, loans were transferred numerous times causing inconsistencies in loan servicing, some loans were purchased by the Department of Education (known as PUT Loans) that caused some borrowers to have three different loan servicing programs, multiple servicers, multiple payments, and multiple issues in getting loans current.  These complexities would be challenging to those who understand financial planning and good credit.  For students with relatively little experience, the outcome has been disastrous.  Many students have gone into default when they most likely would not have ever done so under different circumstances.  These students will pay long-term consequences of defaulting when the cause was beyond their control. This is truly a tragedy for our young adults.

Many of these same students may be able to rehabilitate their loans in the future and that is great for the students.  Unfortunately, for the schools who are also suffering the consequences of defaults that were beyond their control, the rehabilitation may occur past the point where the student would once again be considered in good standing for cohort default rate measurements.  Even greater misfortune is the fact that Gainful Employment regulations do not allow schools to get credit for rehabilitated defaulted loans.  These unintended defaults will never be counted in a school’s “payment made loans” calculations even when the student has rehabilitated and is currently reducing principal.  In a time of chaos and an historically bad economy, no consideration of circumstances has been incorporated into Gainful Employment measures.

Proactive planning is advised for all sectors of education based on current trends for increased cohort default rates in the official 2-year rates and upcoming 3-year rates, coupled with anticipated significant increases.  To give an idea of the potential risk, the historical increases have been applied to the current rates.  Keeping the percent of annual increase and the percent of increase when the third year is added to the cohort default rate calculation, trends will be reaching levels close to or above the threshold for participation and disbursement benefits for many schools.

 

As a reminder, the following are the thresholds for cohort default rates.

 

The high unemployment rate, especially among the college-age population, will adversely affect Gainful Employment rates.  According to the Bureau of Labor Statistics in 2011, the unemployment rate for ages 20-24 is 14.9% and for ages 25 to 34 is 9.4%.  Both are well above the national rate of 8.9%.

Loss of interest subsidies will also have unintended negative consequences to both cohort default rates and gainful employment measures.  Graduate students will no longer have subsidized loans beginning in July 2012.  Also on the plate for elimination as part of the national budget cuts are interest subsidies during grace period for all students.  With negotiations still going on at the time this article was written, those subsidy eliminations may be broadened.  The students’ increased financial burden from the loss of interest subsidies will, most likely, increase default rates and make it more difficult to meet gainful employment measures for both repayment rates and debt-to-earnings ratios.

Here are some things that your institution can do:

1.       MAKE BORROWERS RESPONSIBLE FOR THEIR OWN REALITIES!  Master Promissory Notes and electronic processes have had unintended consequences by taking the responsibilities out of the borrowers’ hands.  We are also dealing with a couple generations of “entitlement” and the names of the funding for “Title IV” and “entitlement programs” sets students up for failure by delivering the wrong message.

2.       Get the students involved in the responsibilities (even when they are not required to do so):

a.       Required Financial Literacy Courses

b.      Individual Entrance Interviews

c.       Check Disbursement Acknowledgements

d.      Individual Exit Interviews

e.      Enrollment updates: Have every borrower sign an In-school Deferment when starting school and when there is a change in their anticipated graduation date.

f.        Address updates: Have students sign “Change of Address” forms for the lenders, servicers, and guarantors.

3.       Use every opportunity you can during and after enrollment to encourage interest payments during deferments and forbearance

4.       Encourage payments first.  If the borrower can’t make full payments, encourage them to pay the accruing interest at a minimum.  You cannot require them to do so, but you can encourage the payments.

5.       Keep the “verbal” counseling to 5-6 basic concepts (provide details in writing to be in compliance) and repeat those basic concepts MANY times.

6.       Put complicated details in writing.

7.       Have every student with prior loans bring the loans current before starting school.

8.       If the borrower is in default, have them fully rehabilitate the loan before starting school.

a.       9 on-time payments within 10 months

b.      Paid-in-full

c.       Rehabilitated through consolidation

NOTE:  Getting a new loan after 6 on-time payments does not rehabilitate the loans for the student or the school!

9.       Update your skip tracing processes because you can’t help students who you can’t find.

a.       Collect at least 6 different references

b.      Verify the references before disbursing funds (minimum of 3 verified prior to start or disbursing funds)

c.       Mail grades and other pertinent information

d.      Send out graduation announcements to “references” collected before graduation (they won’t give bad information for people who they want to brag to)

e.      Collect the graduation announcement information through your teachers or student services, not through financial aid.

10.   Make paying education financial obligations a priority:  Students will prioritize the same way that the school prioritizes so if it is important as a school, it will be more important as a student.

a.       Have posters that stress the benefits of timely payment (financial freedom) and consequences of not paying (default consequences) displayed throughout the school – not just in the financial aid department

b.      Provide borrower education that is consistent, to the point, and easy to understand because students will remember concepts, not details, if they are repeated consistently

c.       Provide complicated materials in writing so that the student can refer to it when needed.  If you get into all of the details in every borrower education session, nothing will sink in

d.      Provide easily-accessible material in a format that your students will relate to like a website that is student-focused and “Gen-Y” in design

e.      Provide a business card that is easy for the student to carry with them and easily accessible

The benefits of participating in Title IV funding for your schools and students can be very financially rewarding.  With those rewards come obligations to educate the students beyond the classroom.  The two go hand-in-hand especially during economic stress and a changing student lending environment.  The pay-off for proactive default prevention and repayment management will have long-term beneficial rewards for the students and schools. 

Our children deserve to have freedom of higher education choices.  As a parent, I implore you to keep believing in what you do because “education is the means for making dreams come true” and most of the dreams of Americans are those served by proprietary school educators.  As an educator, recognize that the challenges that we have faced in the past have made us stronger and I have every reason to believe that this (now) will be no exception.  Thank you for the privilege of being part of changing people’s lives as we work together toward an educated America through freedom of choice in quality higher education.  Know that you make a dynamic difference in our country’s future, one student at a time.

 

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