1 What is Risk Management Andy Cho

2 Agenda  What is Risk Management?  Reducing Delinquency and Default.  Delinquency Patterns and Characteristics  Tools for Schools to Help Students Avoid Delinquency and Default Session 9

3 What is Risk Management?  Risk Management is the continuous management of reducing exposure of loss from non-performing loans.  Includes a balanced review of business results and how to maximize opportunities.  Provides the foundation that supports the quality, composition and profitability of loan portfolio.

4 Why is Risk Management Important?  Department of Education owns or guarantees approximately $290 billion in outstanding student loans.  In 2002 $56.5 billion was delivered in total new federal aid.  There are approximately 22 million borrowers with student loans.  As a taxpayer you are a share/stakeholder in the federally insured student loan portfolio, each of you have a vested interest in insuring that “your” investment is managed well.

5 Advantages of Risk Management  Manages through the life of the loan  Identifies borrower attributes throughout the life cycle of the loan that impact performing and non performing loans  Prevents a “scatter gun” approach to managing the portfolio, which leads to managing on demand  A focused vision and concentrated effort to managing default prevention and reducing the cost to the taxpayer

6

7

8 Sample Report Direct Loans - Defaulted Loans

9 Sample Report - Delinquency

10 Sample Report - Delinquency

11 Sample Report - Delinquency

12 Sample Report - Delinquency

13 Sample Report - Delinquency

14 Sample Report - Delinquency

15 Sample Report - Delinquency

16 As a taxpayer you are a share/stakeholder in the federally insured student loan portfolio, each of you have a vested interest in insuring that “your” investment is managed well. Why is Risk Management Important?

17 Risk Management: Reducing Delinquency & Default Tim Fitzgibbon, Iowa College Student Aid Commission

18 Default Aversion  Required by Regulation  Pre-claims Assistance  Supplemental Pre-claims Assistance  Default Aversion

19 Student Loan Outfitters  Referral service for “high-risk” borrowers  Early awareness and delinquency prevention  Available to all Iowa colleges and universities  Interactive web site

20 Disaster Disaster Relief Grants  Funds available to students and families affected by natural disasters – later expanded  Matching funds from colleges and universities  Recipients agree to limit borrowing  2,100 recipients – Grants average $1,400

21 Foster Grants  Funds available to students formerly in foster care  Recipients agree to limit borrowing  Support from colleges and universities, and Iowa Dept. of Human Services  60% completion rate  $3,000 average award

22 Default Reduction Grants  Funds available to promote innovative default prevention programs at the campus level  Competitive application process  Tiered award levels  Guest speakers, academic courses, community programs

23 Student Assistant Grants  Funds provided to hire “peer advisors”  SAs trained in financial aid, student loan, and debt management basics  Increase awareness, communication on campuses  Refer students to FAOs, ED, lenders, or the Commission

24 Agency Servicing Center  Iowa-based default prevention call center  Based on Commission theme of Iowans-helping-Iowans  Expanding Iowa work force

25 Stafford Late Stage Delinquency Assistance LSDA Ben LeBorys

26 Official Cohort Default Rates

27 Makeup of Cohort Rate

28 Borrower Delinquency Pattern

29 Defaulter Characteristics 12 month average of Stafford borrowers - all cohort years  84% do not receive the advantage of the full 6 month grace period as a result of late enrollment notification  71% have withdrawn from school and did not complete studies  43% have had bad telephone numbers at the time of default  58% have not successfully been contacted by telephone during the 360 day collection effort during delinquency

30 Schools Can Help  Assist the severely delinquent borrowers in establishing communications with the Service Center  There is a small subset of borrowers that have not responded to our attempts to communicate and help them resolve their delinquency  These borrowers will frequently respond to school outreach

31 How It Can Work  Identify the Borrower  Contact the Student  Schools have additional tools to locate Borrowers (i.e. Alumni Association directories, putting holds on records, etc. )  Use addresses and references you have  Schools are not collectors but counselors

Cohort Year Delinquency Detail You can work as little or as much as you want

33 Why Schools Do It ?  Reduce the CDR for their school  Improve the integrity of the program  Rescue over 30% of potential defaulters  Minimal effort, maximum results, schools say “we help the borrowers and the school with a little effort”  Web tools identify & focus on the most severe delinquencies that have a direct impact on a school’s CDR  No major investment in time, staff or money  LSDA really works  It’s the right thing!

34

35 Total Test Results

36 Post Default Cures  14 months after the default condition was cured, 82.49% of the borrowers did not re-default.  24 months after the default condition was cured, 76.70% of the borrowers did not re-default.

37 Perkins Late Stage Delinquency Assistance (Perkins LSDA) John Pierson

38 Perkins LSDA Perkins “Late Stage Borrowers” days delinquent Current default cohort Who is servicing the loan? Institution Outside contractor Why is this important?

39 Perkins LSDA Stafford LSDA principles apply: Do something different Light touch Monthly attention works best Limit investment: cost, time and staff

40 Perkins LSDA When doing LSDA for both Perkins and Stafford: QC your data before you start: Review delinquency lists for overlap. Update contact information Borrower Contact process: How will you do it? Separate LSDA process for each program? Combined LSDA process? Know the rules: Resolution for Stafford and Perkins may be different.

41 Default Analysis: The Long Term Solution John Pierson

42 Default Analysis: The Long Term Solution Our Targets: Stafford Loan Program and Perkins Loan Program

43 Default Analysis: The Long Term Solution Working Assumptions: We cannot effectively change long term patterns until we know who is likely to default. The core remaining default for most Perkins and Stafford portfolios can be impacted through administrative and/or academic intervention while borrowers are enrolled.

44 Default Analysis The Long Term Solution Resources: Data  Institutional student data (FISAP/Perkins)  Department of Education data (Stafford): –Loan Record Detail Report –NSLDS School Repayment Loan Detail Report  Servicer and Guaranty Agency Reports

45 Default Analysis The Long Term Solution Resources: Process  Free software to assist in creating defaulter profile for both Stafford and Perkins  FSA Self-Assessment/ Tools/Schools/Default Management via Schools Portal (fsa4schools.ed.gov)

46 Default Analysis The Long Term Solution Create an intervention:  Collect and analyze data  Identify co-related factors –Examples: retention, GPA, grad rates, etc.  Intervention based upon empirical analysis  Choose the biggest targets  Implement  Track outcome, evaluate, recalibrate

47 Default Analysis The Long Term Solution  Likely problem areas: –Academic? –Administrative? –Other?  The solution may require the active participation of academic and/or administrative (or other) departments and staff.

48 Creating a long term intervention  Change in co-related factors may occur in the near term: reduction in rate of delinquency and default will take longer.  Follow the trail wherever it leads.

49 Contact information Andy Cho Tim Fitzgibbon Ben Leborys John Pierson