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
2009
10/1/2008 - 9/30/2009
2-Year: 10/1/2008 - 9/30/2010
2-Year: Sept. 2011
3-Year: 10/1/2008 - 9/30/2011
3-Year: Sept. 2012
2010
10/1/2009 - 9/30/2010
2-Year: 10/1/2009 - 9/30/2011
2-Year: Sept. 2012
3-Year: 10/1/2009 - 9/30/2012
3-Year: Sept. 2013
2011
10/1/2010 - 9/30/2011
2-Year: 10/1/2010 - 9/30/2012
2-Year: Sept. 2013
2-Year rate (25%)
3-Year: 10/1/2010 - 9/30/2013
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
3-Year rate (30%)
2013
10/1/2012 - 9/30/2013
3-Year: 10/1/2012 - 9/30/2015
3-Year: Sept. 2016
3-Year rate (30%)
2014
10/1/2013 - 9/30/2014
3-Year: 10/1/2013 - 9/30/2016
3-Year: Sept. 2017
3-Year rate (30%)
CDR Used
for School
Sanctions
2-Year rate (25%)
2-Year rate (25%)
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
16%
15.0%
14%
12%
10.0%
10%
School Classification
9.3%
8%
Less than 2 years
2 - 3 years
6%
All schools national average
4%
2%
0%
2007
2008
Source : U.S. Department of Education
2009
2010
2011
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:
• Federal Direct Loans
Corrective Action and Sanctions
2009 3-Year CDR >30%, by Sector
2010 3-Year CDR >30%, by Sector
Public
16%
Public
28.0%
Private
11%
Forprofit
73%
Source : Stephen Burd, Higher Ed Watch, “The Real Story Behind
Corinthian Colleges’ Plummeting Default Rates” 2012.
Private
7.7%
Forprofit
64.3%
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
Timely repayment
24%
24%
Deferment/forbearance not delinquent
Delinquent but not defaulted
16%
36%
Default
*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
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
Financial
Literacy
Only 10% of schools currently
challenge draft CDR data. The
DOE estimates that 40% of
challenges submitted are
accepted.
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.
Retention
College completion is
the best default
prevention tool in a
school’s tool kit!
Student
Success
Outreach to delinquent
borrowers to offer
solutions- emphasizing
affordable repayment
options.
Default
Prevention /
Repayment
Counseling
Early
Intervention
& Grace
Counseling
Online entrance and exit
programs are not enough – in
person counseling, budgeting
and borrower education
needed
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%
– Risk analysis
– 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