and Student Loan Default Risk Management and Student Loan Default

Cohort Default Rate What is a Cohort Default Rate (CDR)? A “cohort” is a group of Stafford Loan Borrowers who entered repayment within a given federal fiscal year (FY). A Cohort Default Rate (CDR) is the percentage of those borrowers in a school’s cohort who defaulted within that federal fiscal year or within the next two fiscal years (24 months) and the next three fiscal years (36 months).

Cohort Default Rate Date Range Fiscal Year Borrowers Enter Repayment (Denominator) Borrowers in Repayment Who Default (Numerator) Official CDR Published CDR Used for School Sanctions 2009 10/1/2008 - 9/30/2009 2-Year: 10/1/2008 - 9/30/2010 3-Year: 10/1/2008 - 9/30/2011 2-Year: Sept. 2011 3-Year: Sept. 2012 2-Year rate (25%) 2010 10/1/2009 - 9/30/2010 2-Year: 10/1/2009 - 9/30/2011 3-Year: 10/1/2009 - 9/30/2012 2-Year: Sept. 2012 3-Year: Sept. 2013 2011 10/1/2010 - 9/30/2011 2-Year: 10/1/2010 - 9/30/2012 3-Year: 10/1/2010 - 9/30/2013 2-Year: Sept. 2013 3-Year: Sept. 2014 3-Year rate (30%) 2012 10/1/2011 - 9/30/2012 3-Year: 10/1/2011 - 9/30/2014 3-Year: Sept. 2015 2013 10/1/2012 - 9/30/2013 3-Year: 10/1/2012 - 9/30/2015 3-Year: Sept. 2016 2014 10/1/2013 - 9/30/2014 3-Year: 10/1/2013 - 9/30/2016 3-Year: Sept. 2017 If a school’s default rate is above 30% for any single that a official calculation is provided a default management plan must be submitted to the Department of Education, beginning with the FY09 3-year rate. “Sanctions” apply when a school loses eligibility after 3 consecutive years above 30% which could not occur until the FY11 rate is released. The default management plan is created and approved at the school level by a school based default management task force. 2011 is the first year a school can have 3 consecutive 3YR CDR rates. Note: Students entering repayment today will be part of the official 2013 CDR which will not be released until September 2016.

2-Year Cohort Default Rate Trends Source : Jordan Weissmann, The Atlantic, “Student-Loan Defaults are Still Soaring Thanks to Washington’s Neglect

Public Institution Comparison Comparison of FY 2011 Official National 2-Year Rates to Prior Three Years School Classification Source : U.S. Department of Education

FY 2010 3-Year CDR By School Type Source : Jordan Weissmann, The Atlantic, “Student-Loan Defaults are Still Soaring Thanks to Washington’s Neglect”, 2013.

3-Year Cohort Default Rate History Source : U.S. Department of Education

3YR CDR Danger Zone Schools with a single-year CDR of 30% or greater must: Establish a default prevention task force Develop a default prevention/reduction plan with measurable objectives for lowering the CDR Submit the default reduction plan directly to DOE Schools with two consecutive years of CDRs of 30% or greater must: Revise the default reduction plan Implement additional measures to prevent and reduce defaults May be subject to provisional certification

3 YR CDR Danger Zone Schools with three consecutive years of CDRs of 30% or greater would lose eligibility to participate: Pell Grant Federal Direct Loans School with a SINGLE year CDR of 40% or greater would lose eligibility to participate:

Corrective Action and Sanctions 2009 3-Year CDR >30%, by Sector 2010 3-Year CDR >30%, by Sector Source : Stephen Burd, Higher Ed Watch, “The Real Story Behind Corinthian Colleges’ Plummeting Default Rates” 2012.

Appeal Options Include Loan Servicing Appeal Within 15 days of notification of official rate Fees may apply Participation Rate Index # Borrowers & # Students enrolled at least half-time http://www.ticas.org/pub_view.php?idx=901 Economically Disadvantaged Appeal Low Income & Placement Rate Low Income & Completion Rate

Student Loan Risk Management Why now? Economy Split servicing Loans transitioned to different servicers Graduate underemployment Transition to 3-Year Cohort Default Rate (CDR) Predatory practices – soliciting payments from students to counsel on default/delinquency resolution Reduction in free outreach initiatives

% of Student Loan Balances 90+ Days Delinquent Source: FRBNY Consumer Credit Panel/Equifax; Data displayed in maps are as of December 31, 2012.

Delinquency Rates for Community Colleges *Does not include borrowers with consolidation loans. Source: Delinquency: The Untold Story of Student Loan Borrowing. March 2011. Report by the Institute for Higher Education Policy

The Biggest Risk Factor Students who do not graduate 62% of borrowers who default did not complete their program of study! Risk factors affecting persistence and attainment: Delayed enrollment Part-time enrollment Working full-time while enrolled Single parent status

Other Risk Factors Pell recipients Parent educational attainment Students have limited financial resources to use to repay loans if they do not graduate, if unemployed or if wages do not increase following program completion. Parent educational attainment Default is less likely if at least one parent has a Bachelor’s degree. Larger household size Students from larger households may be at higher risk of default.

Challenges to Keeping CDR Low Colleges are open access Retention and graduation rates are critical Default rates may be considered a “Financial Aid” issue by administration Staffing and technological resource constraints Borrowers who become delinquent are no longer your students

Reducing Risk Option 1 Cease student loan program participation Negative impact on enrollment and access CDR rates and defaults continue for several years

Reducing Risk Option 2 Develop default management plan and devote resources to manage risk Default management task force Holistic approach – school wide Create plan/work the plan Know your RISK Make it an institutional priority Best Practice

Where to Start Student Success Retention Financial Literacy Early Intervention & Grace Counseling Default Prevention / Repayment Counseling CDR Challenges / Appeals School-based products to help students understand financial products and services. Goal: to change student attitudes toward debt and reduce over-dependence on student loans. Only 10% of schools currently challenge draft CDR data. The DOE estimates that 40% of challenges submitted are accepted. College completion is the best default prevention tool in a school’s tool kit! Retention Online entrance and exit programs are not enough – in person counseling, budgeting and borrower education needed Outreach to delinquent borrowers to offer solutions- emphasizing affordable repayment options.

Risk Management & Student Success Increase resources for financial aid counseling Institutional control of loan process Staff training and technology Gather reference data Outsource or Insource outreach initiatives Post enrollment Repayment education and assistance Helps borrowers be successful long term Re-enrollment counseling/collaboration with Retention Office

California Community Colleges (CCC) 72 Districts, 112 Colleges 2.35 million students (2012-13) 19 colleges no longer in federal loan program 93 colleges still participating in federal loan program 63,000 loan borrowers – 2.68%

California Community Colleges (CCC) Three colleges had FY09 rates above 30% 12 colleges had FY10 rates above 30% Three reached their 2nd year above 30% One school is at its 3rd year above 30% Several other colleges are trending to above 30% in future years All colleges will be eligible for low participation rate appeals if they reach three years above 30%

CCC Default Prevention Initiative Have retained consultant to assist Tier 1 = over 30% for two years Tier 2 = over 30% for one year Default prevention plans Risk analysis Third-party service contract negotiation Tier 3 = between 20% and 30% Discuss need for third-party services

CCC Default Prevention Initiative The System Office is considering purchasing financial literacy services for all colleges. The Chancellor’s Office is recommending that all schools be involved in the initiative including those no longer actively participating in the federal loan program.

Future Regulatory Considerations Gainful Employment College support loan limit reductions for community colleges DOE may consider program level default rates Legislator rhetoric regarding “risk share”

Contact Information Judith Witherspoon, Senior Vice President Edfinancial Services 865.342.5200 jwitherspoon@edfinancial.com Rhonda Mohr, Specialist, Student Financial Aid California Community Colleges Chancellor’s Office 916.323.6894 rmohr@cccco.edu