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					    U.S. Department of Education
     Default Prevention Update


Michigan Default Aversion Symposium V
          October 28, 2009




                               1
                                                                             National Student Loan Default Rates
Issue
Date
                           1989   1990   1991       1992     1993    1994    1995    1996    1997   1998    1999     2000     2001        2002     2003     2004    2005    2006    2007 2008 2009
                      25
                                                      22.4%
                                            21.4%

                      20
                              17.6%                                                                                                                                        06 to 07
                                                                                                                                                                           +28.8%
                                                             17.8%
                                     17.2%                                  15.0%
Cohort Default Rate




                      15


                                                                                     10.7%    10.4%
                                                                                                            8.8%
                      10
                                                                              11.6%
                                                                                                    9.6%           6.9%
                                                                                                                                                                                             6.7
                                                                                                                            5.6% 5.9%

                       5
                                                                                                                                            5.4% 5.2%                  5.1%            5.2
                                                                                                                                                             4.5%              4.6


                       0
                              1987   1988    1989     1990    1991    1992    1993    1994   1995   1996   1997    1998     1999   2000     2001     2002    2003    2004    2005     2006   2007
                                                                                                    Cohort Years
  National: Borrowers in Default

2003      115,568
2004      144,128   (+24.7%)
2005      161,951   (+12.3%)
2006      204,507   (+26.4%)
2007      225,371    (+10.2%)




                                   3
     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%)




                                    4
   Michigan: CDR

2004   4.2%
2005   4.0%
2006   4.3%
2007   5.8% (+34%)




                     5
Michigan: Dollars in Default

FY 2004 FY2005    FY 2006   FY 2007
$22.7m   $25.2m   $31.3m    $39.9m (27%)




                                 6
             Michigan:
          Borrowers in Default

FY 2004   FY2005 FY 2006   FY 2007
4,056     4,571    5,563    7,006 (25.9%)




                                  7
          Default Prevention Challenges

• Increasing loan default in a changing landscape
• The Recession
• All Direct Loan environment
• The Golden Goose
• The Three-Year Calculation




                                                    8
         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.

                                       9
         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.

                                              10
 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.
                                                         11
         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.

                                                    12
    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


                                                      13
        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).

                                                       14
         2-Year Cohort Rate Monitored

Cohort      Years      Official Rates      2-Year
 Year      Monitored    Published         Sanctions

2007     2007, 2008    2009             Yes at 25%

2008     2008, 2009    2010             Yes at 25%

2009     2009, 2010    2011             Yes at 25%

2010     2010, 2011    2012             Yes at 25%

2011     2011, 2012    2013             Yes at 25%



                                                      15
       3-Year Cohort Rate Monitored

Cohort      Years      Official Rates        3-Year
 Year      Monitored    Published           Sanctions

2009     2009, 2010,   2012             No (Will receive 3-
         2011                           year calculation, but
                                        no sanction applies.)

2010     2010, 2011,   2013             No (Will receive 3-
         2012                           year calculation, but
                                        no sanction applies.)

2011     2011, 2012,   2014             Yes at 30%
         2013
2012     2012, 2013,   2015             Yes at 30%
         2014


                                                                16
      Three-Year Sanctions: The Details
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 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

                                                           18
           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.


                                                       19
            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, 2011.
                                                          20
        Traditional vs Non-Traditional
                 Strategies
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.



                                                          21
        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
                                                    22
         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


                                                         23
        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….?


                                          24
       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



                                         25
                  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.


                                                                       26
              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.


                                                         27
            FSA Contact Information
Default Prevention
Mark Walsh         816-268-0412 mark.walsh@ed.gov
John Pierson       404-974-9315 john.pierson@ed.gov
Portfolio Performance Management
(CDR calculations and data challenges)

Main Line:         202-377-4258
Hotline:            202-377-4259
Email: fsa.schools.default.management@ed.gov
Web:     ifap.ed.gov/DefaultManagement/DefaultManagement.html

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