ccDaily > Tips to manage student loan defaults

Tips to manage student loan defaults

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Commentary
​Judith Witherspoon

​Cohort default rates are on the rise for many colleges and universities. The reasons are numerous — changes in the cohort calculation formula, the current economic climate, and low student program or degree completion.

Newspaper headlines suggest that cohort default rates are increasing because students borrow too much. While high debt burdens are troublesome for students, the data at the community college level tells a different story.

The single biggest risk factor for community college students is program completion. A defaulted loan borrower at a community college is likely to have a loan balance somewhere between $3,500 and $4,000. In many cases, the student obtains a freshman-loan but does not complete his or her program of study. College administrators should consider attacking the issue on two fronts — students currently enrolled and students in active loan repayment status.

Program completion

Studies have shown that the majority of defaulted borrowers do not complete their program of study. A 2011 report released by the Institute for Higher Education Policy noted that borrowers “who left school without a credential, last borrowed after attending one year of college or less, or attended a public two-year or for-profit institution, were far more likely than their counterparts to become delinquent or default during the first five years of repayment.”

This article comes from the June/July edition of the Community College Journal, published by the American Association of Community Colleges.

A literature review published in the National Association of Student Financial Aid Administrators’ Journal of Student Financial Aid stated, “The majority of the research we reviewed suggested that completing a postsecondary program is the strongest single predictor of not defaulting regardless of institution type.” Institutional investments in retention can reduce the likelihood of default for students currently enrolled, but colleges must also focus on the needs of those students currently in repayment.

Monitor repayments

What should you know and when should you know it? The methodology behind the cohort default rate calculation formula includes borrowers from previous enrollment periods — some as far back as eight years or more. Traditionally, college administrators wait until the U.S. Department of Education reports the cohort draft rate in February or the official rate in September before deciding to allocate resources to address rising default rates. This approach is reactionary and can place the institution at risk.

Think of cohort default rates in waves. By the time a draft rate is released for one cohort year, the year behind it is 81 percent complete. For example, the three-year 2011 draft rates were released in mid-February of 2014. If a college’s 2011 draft rate exceeded 30 percent, it is very likely that the 2012 rate would follow a similar trajectory.

The issue with student default rates

At the time the 2011 rate was released in February, only seven months remained in the calculation period for the 2012 rate. Any intervention effort focused on the 2012 cohort would be severely limited simply by a lack of time. If a college waits until an official cohort rate is released in mid-September 2014 to take action, it will only have two weeks remaining in the calculation period for the 2012 cohort default rate.

College administrators need to focus on the entire picture and be proactive as students initially enter repayment status and when cohort rates close. By monitoring all active student loan repayment cohorts, colleges can determine if resources need to be directed to default prevention initiatives, when to begin the outreach initiatives, and where to target the efforts.

Student repayment status data collection and aggregation can be cumbersome and burdensome for college financial aid administrators; however, third-party organizations provide software or turnkey data collection and monitoring services.

Triage for high-risk borrowers

College financial aid administrators provide entrance and exit counseling for student loan borrowers when the initial loan originates and again when the borrower drops to less than half time, graduates, or withdraws from school. Counseling may be delivered online, in person, or in a classroom setting. While the information provided can be very helpful for borrowers, many need one-on-one counseling later in the repayment cycle.

Community college borrowers may be less experienced with debt and intimidated by servicing and collection efforts on behalf of assigned loan servicers. More and more colleges have elected to provide targeted, one-on-one counseling to borrowers who become delinquent during the repayment cycle. This triage counseling is performed at critical points during the repayment cycle by college staff, a third-party entity, or a combination of the two.

The most effective triage counseling programs first determine why the borrower is unable to make a loan payment. Understanding the unique circumstances that may impact the individual borrower is an essential step in finding a repayment solution that will allow the borrower to be successful over the long term.

Fixing the unintended perils of student loan default rates

Counselors can assist the borrower with understanding and applying for reduced payment programs, such as income-based repayment options. Once the counselor and borrower determine the best solution, a call can be made to the appropriate servicer. If borrowers have loans with different servicers, calls will need to be made to all parties.

In some cases, the counselor may recommend loan consolidation if it is in the best interest of the borrower. Loan repayment can be intimidating; however, once students establish trust in their loan counselor, they can reach out to the counselor again if they have difficulty.

This triage counseling strategy proved effective for Tyler Junior College  in Texas. Using a third-party provider, the college focused outreach efforts on the 2011 cohort population. Outreach campaigns were conducted over a 22-month period representing 61 percent of the cohort calculation period.

The college’s cohort default rate was reduced by 8 percent from a high of 28.9 percent for the three-year 2010 rate to 20.9 percent for the three-year 2011 rate. The college also saw overall loan delinquency rates decrease by 46.8 percent.

Set a prevention plan

Whether your college has a cohort default rate of 10 percent or 25 percent, it is advisable to have an up-to-date default prevention plan. Many colleges have established a standing committee of staff, faculty, and even student representatives to help create a plan and monitor compliance. The Education Department provides information to assist administrators in creating a Default Prevention and Management Plan. More information is available through the Information for Financial Aid Professionals website.

Successful student loan cohort default management is a campuswide endeavor. It is not just the responsibility of the financial aid department. Effective retention programs, academic success, and borrower education are needed to help borrowers complete college and successfully repay loans. When it comes to student success, it truly does take a village.

Witherspoon is senior vice president for Edfinancial Services.

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