Driving college loan defaults down
The coming change in how student loan default rates are calculated may mean bad news for some colleges and universities.
With the new calculations, the rate at which a group of students later defaults on loan payments will increase for most institutions, and schools with a particular default rate for three consecutive years will lose the ability to give Pell Grants. That’s why many are seeing this as the ideal time to look at how default prevention services are managed.
“Before outsourcing default prevention, we did not have any communication after students left our institution,” says Leigh Ann Hussey, director of financial aid at Mississippi Gulf Community College’s Perkinston Campus. “We had exit counseling but not all borrowers completed it. And unless a student contacted us, we had no contact with them at all.”
Outsourcing delinquent borrower outreach to a company focused on default prevention is an aggressive defensive approach that can have a real impact on loan payment rates.
The provider helps delinquent borrowers get on a payment plan, but does not actually collect money from them.
“Default prevention is a laborious process that requires a lot of time and people,” says Karen McCarthy, a senior policy analyst for National Association of Student Financial Aid Administrators. “These companies know what efforts are fruitful, so time won’t be wasted on tactics that don’t work.”
Default prevention companies have the staff to call students on weekends and evenings, says McCarthy. They also can locate people who are unreachable (intentionally or unintentionally) through “skip tracing,” wherein borrowers are found through phone number databases, credit reports, utility bills and other records.
Default prevention companies:
- Have the staff to call students on weekends and evenings.
- Can locate borrowers through skip tracing.
- Are cheaper than hiring an in-house calling team.
- Provide real-time reports of current trending CDR rates for a given fiscal year
- Can transfer borrowers to loan servicers and stay on the line to provide support.
- Do data analysis to identify at-risk borrowers when they’re still students.
All of these extra efforts will be particularly important as of this September, when the official fiscal year 2011 cohort default rates—that is, the rate at which a group of students later defaults on loan payments—will be published, and the transition to the three-year CDR will be complete. In other words, the three-year rate will be calculated on borrowers who default in the following two fiscal years, rather than only one under the old two-year CDR.
And it’s institutions with a 30 percent CDR for three consecutive years who will no longer be able to offer Pell Grants. Here’s why outsourcing default prevention was the right decision for several institutions that have also found borrowers to be better served by the switch.
Baker College System: Getting a manpower boost
With more than 35,000 students at 17 campuses and an online program, leaders of Michigan’s Baker College System always recognized a need to keep up with borrowers who’ve left school, even decades ago.
“I was hired 22 years ago as a default prevention specialist,” says Susan Doyle, the system student loan officer. “It was not very common at all for a school to have someone like myself to work on delinquencies to help prevent defaults. In fact, I remember it was extremely hard at first to have a lender even speak to me about a borrower who was delinquent.”
Doyle sent letters to delinquent borrowers, but administrators knew phone calls were more effective than letters, says Linda Katrinic, director of financial aid. However, the financial aid department at the system level, with 30 employees, did not have the staff to handle a large volume of calls.
Three years ago, when the number of borrowers in repayment exceeded 18,000, Doyle was asked to determine the cost of having an in-house department dedicated solely to calling delinquent borrowers. When deemed too expensive, she and Katrinic began vetting default prevention vendors.
Loan Default Lingo
Cohort default rate(CDR): The percentage of an institution’s student loan borrowers who enter repayment and then default prior to the end of the next one (under the old two-year CDR) or two (under the new three-year CDR) federal fiscal years.
Default prevention company : A third party that can contact delinquent borrowers in attempts to sign them up for repayment plans.
Default prevention task force: A requirement for institutions whose CDR is over 30 percent for one year. The task force must develop a plan with measurable objectives for lowering the CDR and submit it to the U.S. Department of Education.
Fiscal year: The federal fiscal year runs from Oct. 1 to Sept. 30. The percentage of total borrowers who default in a specific fiscal year is recorded, and that data is available three fiscal years later.
Loan servicer : Companies that distribute student loans. Default prevention companies will often work with default borrowers and their servicers to get them on track with the best repayment plan.
Skip tracing: When default prevention companies locate borrowers using phone number databases, credit reports, utility bills and other records.
Three years at 30 percent: A rate institutions will be penalized for hitting. If an institution’s CDR is over 30 percent for three years, it loses the ability to participate in the Federal Direct Loan Program and the Federal Pell Grant Program.
“We wanted to find a vendor who would let us have input into how they would speak with our borrowers,” says Katrinic. “We didn’t want canned responses.”
Doyle wanted a company that could talk to students about all of their repayment options, and not just quickly discuss standard repayment to get off the phone faster.
Officials selected Responsible Repay, a Nelnet service. The company offered a level of transparency with which Doyle felt comfortable. “They record all calls with our borrowers, so if a borrower calls us confused after a call with Responsible Repay, we can pull the recording and address any issues.”
Results so far have been positive. For fiscal year 2007, the system posted a 20 percent three-year CDR. That dropped to 19.1 percent for fiscal year 2010. The expected rate for fiscal year 2011, which is the first group of borrowers Responsible Repay has worked with for the full three years, is 17.6 percent.
In this case, the system simply needed the manpower to handle the calls necessary to counsel borrowers, Doyle says. “I know from experience that if you get a borrower on the phone, 99 percent of the time you’ll get that delinquency resolved.”
Hocking College: Finding a new provider
A fiscal year 2010 CDR of 31.4 percent and subsequent pending loan sanction by the federal government spurred Deneene Merchant, director of financial aid for Hocking College in Ohio, into action.
“It became apparent that the services of the previous company were not acceptable and the college had to take aggressive measures,” she says.
Due to the dire situation, the team at Hocking sought a provider that would know how to contact students—with proven results. After USA Funds was selected, data from loan servicers and the college had to be transferred to the Borrower Connect system, USA Funds’ online automated borrower communication tool, Merchant says.
USA Funds gives Hocking real-time reports. “We can see trending data of how USA Funds is performing for us CDR-wise at any time,” says Merchant.
And what is currently trending for fiscal year 2011 makes Merchant very happy. “Our current rate is trending between 21 and 25 percent,” she says. “We are definitely moving in the right direction.
Portland Community College: Opening up an internal literacy focus
A desire to focus on student financial literacy is what prompted administrators at Portland Community College in Oregon to find a vendor who could handle calling of delinquent borrowers. After sending an RFP to seven potential servicers in 2013, a committee of students and financial aid staff chose Inceptia because of its supportive approach to borrowers.
“Once they got a borrower on the phone, they would then connect the borrower to their loan servicer and stay on the line to make sure the borrower understood what repayment plan they were agreeing to,” says Christine Chairsell, vice president of academic affairs and student services.
The fee structure also worked—Inceptia charges for each student whose default gets resolved. “If the student defaults again, they do not charge for the second time they resolve the delinquency,” she says.
For fiscal year 2010, the three-year CDR for the college had been 20.3 and the graduation rate was 17 percent. In the wake of a challenge from the institution’s president to flip those numbers, the projected three-year CDR for fiscal year 2011 is down to 16.5 percent and the graduation rate is up to 19 percent.
Inceptia also performs data analysis to identify at-risk students, says Veronica Garcia, dean of student affairs. “We were able to see which students were at the highest risk of defaulting and concentrate extra financial literacy efforts on them while they’re still in school.”
Do not simply go with the servicer that offers the lowest bid, Garcia advises. “The cheapest option may not give you the results you hope for,” she says. “Select the provider that you think can make a real impact on your CDR and offer the best service to your borrowers.”
Huston-Tillotson University: Saving resources, serving students better
The financial aid office at Huston-Tillotson University in Austin had a full-time default prevention specialist prior to fiscal year 2009, but the position was not successful. “There was a high turnover rate and the job paid a high salary,” says Antonio Holloway, assistant director of financial aid. “We decided it would be cheaper to outsource and let a third party make phone calls.”
Holloway also hired a lower-salaried financial literacy and default prevention coordinator to be the point of contact for the third-party servicer. This staffer also facilitates default prevention workshops to current students to reduce the number that become delinquent.
TG’s HigherEDGE service was selected because of the company’s location near the school and reputation in Texas, says Holloway, adding that “they have done everything we’ve expected.”
For fiscal year 2010, the university’s three-year CDR had been dangerously high at 30.4 percent. TG’s services helped bring that down to a projected 28 percent for 2011. Holloway says, “The goal is to bring that number below 15 percent, which we think we can do.”
Kylie Lacey is associate editor of UB.