1 U.S. Department of Education Default Prevention Update Michigan Default Aversion Symposium V October 28, 2009

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3 National: Borrowers in Default , ,128 (+24.7%) ,951 (+12.3%) ,507(+26.4%) ,371 (+10.2%)

4 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%)

5 Michigan: CDR Michigan: CDR % % % % (+34%)

6 Michigan: Dollars in Default FY 2004 FY2005 FY 2006 FY 2007 $22.7m $25.2m$31.3m $39.9m (27%)

7 Michigan: Borrowers in Default FY 2004 FY2005 FY 2006 FY ,056 4,5715,563 7,006 (25.9%)

8 Default Prevention Challenges Default Prevention Challenges Increasing loan default in a changing landscape The Recession All Direct Loan environment The Golden Goose The Three-Year Calculation

9 Default Prevention Challenge Volume 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.

10 Default Prevention Challenge Rapidly Changing Landscape Default Prevention Challenge 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.

11 Default Prevention Challenge: Recession Default 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.

12 Default Prevention Challenge: New Servicing Partners Default Prevention Challenge: 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.

13 Default Prevention Challenge Moving Beyond Default Rate Default Prevention Challenge 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

14 Default Prevention Challenge Three-Year Calculation Default Prevention Challenge 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 Monitored 2-Year Cohort Rate 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% 15

3-Year Cohort Rate Monitored 3-Year Cohort Rate 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% 16

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 17 Three-Year Sanctions: The Details Three-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

19 Default Prevention Plan Default 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 Waivers CDR 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,

21 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 Strategies

22 Traditional Approaches to Successful Default Prevention Traditional Approaches to 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

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

24 Non-Traditional Approach: Promoting Student Success Non-Traditional Approach: 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….?

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

26 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.

27 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.

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