ACICS June 8, 2010 Reducing Delinquency and Default John Pierson Delinquency and Default Prevention FSA/Direct Loan Servicing Division U.S. Department of Education

2 Cohort Default Rates ( ) 2007 to draft % Draft 2008 CDR = 7.2%

national borrowers in default , ,128 (+24.7%) ,951 (+12.3%) ,507(+26.4%) ,271 (+10.2%) 2008* 244,997( +8.8%) *draft 3

4 The Dollars in Default Volume of Dollars in Default: not currently used to measure schools, however, the Dollars in Default impact the integrity of the student loan program and demand attention! Big schools + big volume = Big Dollars in Default Private loans = more debt for borrowers Accomplishment of President’s education priorities depend in part on repayment of student loans

national dollars in default 2003 $647.7m 2004 $801m(+23.6%) 2005 $915m(+14.2%) 2006 $1.183b(+22.9%) 2007 $1.279b (+8.1%) 2008* $1.744b(+36.3%) *draft 5

career schools: a recent CDR history % (*draft) % % % % Career Sector CDR Estimates 6

career school industry – percentage of default portfolio FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 *draft 50,72960,37982,995 92,73106, %*37.3%40.5% 41.1%43.3% Source: DL/FFEL portfolio. *Data is estimated as FSA does not publish. 7

career school industry – percentage of default portfolio Source: DL/FFEL portfolio. *Data is estimated as FSA does not publish. 8 FY 2003FY 2004FY 2005FY 2006FY 2007 FY 2008 *draft m 289.9m 291.7m 409.2m 437.3m 603.5m 17.8% 36.1% 31.8% 34.5% 34.1% 34.5%

9 FY 2008 Draft CDR Your FY 2008 draft data? Up, down, sideways? Are you concerned?

10 Default Prevention Challenges Increasing Default/Changing Landscape The Consequences of Loan Default The Recession The Dollars in Default Transition to Direct Loans Our New Servicing Partners: PUT/DL etc 3 Year CDR Calculation Sept 2012 –New Requirements for –Timelines

11 The Consequences of Default Not only does student loan default impact the integrity of the student loan programs, but there are significant consequences for: Schools Borrowers Taxpayers I (Collecting Defaulted Loans) Taxpayers II (Funding New Initiatives)

12 The Consequences of Default For the Borrower Damage to credit report (7-year minimum) Wage garnishment Seizure of federal and state tax refunds Seizure of portion of any federal payment Legal action in federal district court Title IV ineligible May lose state occupational license No mortgage loans May have difficulty obtaining car loans May be unable to rent an apartment May be turned down for jobs

13 The Consequences of Default For Schools The CDR is a measure of a school’s administrative capability High CDRs can –Negatively reflect on school quality –Result in loss of Title IV eligibility –Threaten continued access to both Stafford and private loan funds –May mean a lot of extra work!

14 The Consequences of Default For Taxpayers Collections (Taxpayer I) –We never get it all back New Revenue Stream (Taxpayer II) –Intention to fund new initiatives from revenues generated by loans in repayment –Premium placed on increasing loans in repayment from all schools

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

16 Our New Servicing Partners Transition to all-Direct Loan origination FFELP schools will have new default prevention partners for DL, PUT and Conduit loans Default prevention services still in design stage: Resources, tools may be different from contractor to contractor –Get to know new servicers New Delinquency Report from NSLDS

Get to know the Federal Loan Servicers: 17 Direct Loan Servicing Center NSLDS Servicer Code: NSLDS Name: Direct Loan Servicing Center Borrower Phone: Web: School Phone: Web: Student Loan Servicing Center (ACS) NSLDS Servicer Code: NSLDS Name: Dept of ED / ACS Borrower Phone: Web: School Phone: Web:

Get to know your Federal Loan Servicers: 18 FedLoan Servicing (PHEAA) NSLDS Servicer Code: NSLDS Name: Dept of ED/ FedLoan Servicing (PHEAA) Borrower Phone: Web: School Phone: Web: Great Lakes Educational Loan Services NSLDS Servicer Code: NSLDS Name: Dept of ED/ Great Lakes Borrower Phone: Web: School Phone: Web:

Get to know your Federal Loan Servicers: 19 Nelnet NSLDS Servicer Code: NSLDS Name: Dept of ED / Nelnet Borrower Phone: Web: School Phone: Web: Sallie Mae NSLDS Servicer Code: NSLDS Name: Dept of ED / Sallie Mae Borrower Phone: Web: School Phone: Web:

20 The 3-Year CDR Calculation Expands the default tracking window from 2 years to 3 years First official 3-year CDR September 2012 Raises penalty threshold from 25% - 30% A new set of consequences –Three strikes (FY’s 09-10)and you’re…… Some schools will face loss of eligibility in September 2014 (FY 2011 CDR) Increases availability of “disbursement relief” from 10 to 15% (effective 10/01/11)

“ Trial” 3-Year Rates Released FY 05, FY 06, FY

22 2-Year CDR Monitored Cohort Year Years Monitored Official Rates Published 2 year Sanctions , Yes at 25% , Yes at 25% , Yes at 25% , Yes at 25% , Yes at 25%

23 3-Year CDR Monitored Cohort Year Years Monitored Official Rates Published 3 year Sanctions , 2010, No (Will receive 3- year calculation, but no sanction applies.) , 2011, No (Will receive 3- year calculation, but no sanction applies.) , 2012, Yes at 30% , 2013, Yes at 30%

24 3-Year CDR Sanctions Beginning with the 2009 CDR (published September 2012) 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 And the details….

25 3-Year Sanctions - The Details First year at 30% or more –Default prevention plan and task force: complete analysis of default risk; develop measureable interventions; develop plan…while the clock runs –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: Pell, ACG/SMART, DL –School has appeal rights –School may appeal based on mitigating circumstances

26 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 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

27 Default Prevention “Traditional” Approach Primarily involves the financial aid office Focus is 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: LSDA

28 “Non-Traditional” Approach Ideally involves all offices on campus Focus is on helping borrowers to develop a healthy relationship with their education (student success solutions) and include: –Increasing program completion rates –Decreasing program completion time –Employment assistance for those who complete and those who don’t

29 “Non-Traditional” Approach Borrowers Who Do Not Complete The Direct Loan program serves 7 million student loan borrowers. Of the borrowers who defaulted, 70% withdrew without completing their academic program. (actual population) While different measures of success exist, this is an important indicator that students who fail to complete are at high- risk to default. Source: August 2008 Analysis Federal Direct Loan Portfolio

30 “Non-Traditional” Approach Borrowers Who Do Not Complete Did not achieve academic credential May have reduced earning power May not benefit from school job placement Have one or more loans to repay May not receive exit counseling May not respond to communication attempts by their loan servicer May lose part or all of their grace period if they fail to notify the financial aid office and NSLDS is not updated timely and accurately

31 How quickly do you find out someone is having difficulty? –End of term is too late. Do you have an “early warning” system? Make it somebody’s responsibility for reaching out to those borrowers because they are at high risk of default –Offer a variety of interventions “Non-Traditional” Approach Borrowers Who Do Not Complete

32 Promoting Student Success Key: The right student in the right program with the right support services leading to program completion and employment. Explore the unique connections between loan default and student success at your school. Data collection: – Info from current students – Info from former students

33 Take Home Message 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 –Assess their degree of risk for exceeding CDR thresholds –If current 2-year CDRs are at/near double-digit, schools cannot afford to wait until September 2012 to take action.

34 Take Home Message There are many things schools can do now to protect the taxpayer, school, and its borrowers from the consequences of default including: –Implementing traditional, financial aid-based strategies, and – Implementing non-traditional student success-based strategies. – Reaching out to FSA default prevention staff and others for assistance.

35 Help is Available FSA Default Management Division Telephone: Loan Servicers: See slides for contact information The Cohort Default Rate Guide FSA Assessments ment.html

36 Default Prevention Contacts John Pierson Mark Walsh Portfolio Performance Management (CDR calculations and data challenges) Main Line: Hotline: Web: ifap.ed.gov/DefaultManagement/DefaultManagement.html