The Real Price of Student Loan Defaults NMASFAA March, 2012 Brenda McCafferty, Strategic Business Director

The Real Price of Student Loan Defaults

NMASFAA

March, 2012

Brenda McCafferty, Strategic Business Director

Current National TrendsFactors affecting need for increased financial aid:

• Decreased state aid

• Tuition increases

• Pell Grant formula changes

• Economic downturn

• Increased student indebtedness

Financial Aid Overview

2Confidential. Do not copy or redistribute without expressed written permission from Inceptia.© 2012 Inceptia

Financial Aid Overview

Current National TrendsFactors related to increased default rates:

• More borrowers

• Greater amounts borrowed

• Lower income-earning potential

• Higher default rates

• Shift to 3-year calculation of default rate

• Misunderstood repayment options


Default Overview

Not just student borrowers are affected:• Nation• Region• State• Community• Schools• Programs


5

Cohort Default Rates

What is a cohort?• Group of borrowers who entered repayment in

a Fiscal Year*

How is the default rate calculated?• Borrowers entering repayment in a Fiscal Year

are tracked over three years to determine if they meet their loan repayment obligations or not.

* Federal Fiscal Year: Oct. 1 – Sept. 30

Confidential. Do not copy or redistribute without expressed written permission from Inceptia.© 2012 Inceptia

6

What is a Cohort?

• A group, similar set of characteristics

• Included loans: Stafford

Subsidized

Unsubsidized


7

The Equation

Borrowers in the cohort who default within cohort default 3 year period

(Numerator)

Cohort of federal student loan borrowers who enter repayment during cohort fiscal

year (Denominator)

X 100 = CDR


National Statistics

9

Student Borrowing

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

40.1% 40.7% 41.4%43.1% 44.0% 44.6% 43.5%

45.6%

48.6%

Percent (%) of 1st Time Full-Time Undergraduates Tak-ing Out Student loans

The U.S. Department of Education statistics show that the percentage of all undergraduate students borrowing has trended up significantly since 1995.*

*Source: NCES Trends in Student Financing of Undergraduate Education


10

National Default Rates

• Even as the number of borrowers increases, so has the percentage of defaulters.

• The U.S. Department of Education reports that the rate of student loan default is on a steady upward trend.

2005 2006 2007 2008 2009

4.6%5.2%

6.7% 7.0%

8.8%

National Cohort Default Rate*

*Includes US, foreign and US Territories

Confidential. Do not copy or redistribute without expressed written permission from Inceptia.

11

National Default Rates

© 2012 Inceptia

FY05 FY06 FY07 FY08 FY09

4.6%5.2%

6.7% 7.0%

8.8%8.7%7.7%

12.7%13.7%Two-Year Official Three-Year Trial

Co

ho

rt D

efa

ult

Ra

te

The trial three-year* default rates mean that borrowers will have a longer period of time to default and overall default rates will be higher across the board.

* Three-year rates are trial through FY08 and official beginning FY09

12

How big is the problem?

• More than $1.17 trillion in federal education loans have been made since the beginning of the loan programs.*

• The student loan balance is now $870 billion , surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion).**

• Of the 241 million people in the United States who have a credit

report with Equifax, about 15.4 percent—or 37 million —hold outstanding student loan debt.**

• $580 billion of the total $870 billion in student loan debt is owed by people younger than forty.**

*Source: Mark Krantrowitz, FinAid.org**Source: Federal Reserve Bank of New York, Household Debt and Credit Q3, 2011


13

Student Loans in Default

• How much money are we talking about?• Overall $870 Billion in outstanding student loans

• Loans in default are $47.4 Billion*

*Source: FinAid, Mark Krantowitz, www.finaid.org


2009 Data by School Type

Type of Postsecondary School Defaulters Repayers Avg. Default Rate

All Two-Year Schools 309,972 2,277,133 13.6%All Four-Year Schools 701,564 6,325,674 11.1%

Public Postsecondary Schools 165,866 2,542,296 6.5%Private Postsecondary Schools 58,292 1,062,087 5.5%For Profit Postsecondary Schools 787,385 4,998,429 15.8%Grand Total 1,011,531 8,602,829 11.8%


2009 Data by School Type

15

Type of Postsecondary School # Schools* $ In Default

All Two-Year Schools 3,017 $2,026,500,406

All Four-Year Schools 2,138 $6,464,895,646

Public Postsecondary Schools 1,580 $936,259,131

Private Postsecondary Schools 1,314 $387,137,105

For Profit Postsecondary Schools 2,261 $7,167,999,802

Grand Total 5,155 $8,491,396,006

*Number of schools with data


Regional & State Statistics

Impact of Default

What is the impact regionally?- Balances rising in Southeast

- Northeast & Midwest states among “high debt” states

Outstanding $ balances, April 2011, % change year ago

Sources: Equifax. Moody’s Analytics, Regional Financial View, July 2011


18

Regional CDR Trends

2007 2008 2009

8.4%9.1%

11.9%

Default Rates SASFAA


19

2009 Default Data - Region

CDR REPAYERS DEFAULTERS

2009 11.9% 1,418,940 169,504

2008 9.1% 129,4551 11,7273

2007 8.4% 119,8601 10,0673


20

Mississippi CDR Trends

2007 2008 2009

8.8% 8.7%

10.1%

Default Rates Mississippi


21

2009 Default Data - Mississippi

CDR REPAYERS DEFAULTERS

2009 10.1% 32,049 3,227

2008 8.7% 30,578 2,662

2007 8.8% 31,093 2,745


Cost of Default Is Too Great To Ignore

Costs To An Institution

• Lost revenue – Tuition, Room and Board• Regulatory sanctions

• Title IV eligibility• Single-term disbursements• First-time borrower disbursement delay

• Reputation• Decreased Alumni giving


24

Costs To An Institution

Sanctions • 30% default rate for one year = submission of mandatory default

aversion plan• 30% for second consecutive year = submission of an additional

mandatory default aversion plan• 30% default rate for three consecutive years or 40% for any one

year = sanctions and possible loss of eligibility to disburse federal funds

IncentivesThree years of default rates below 15% = ability to disburse loan funds without 30 waiting period.


Impact on Students

• Unmanageable amount of long term debt• Fees • Interest• Collection cost

• Not eligible for Title IV aid• Loss of Pell Grant, Loans

• Degree completion on hold• Credit Rating• Decreased ability to buy homes, cars, etc.


Attacking The Problem

26

SolutionsThe U.S. Department of Education recommends that colleges create their own Default Prevention Plans.

Basic Elements:

I. Periodic review of data

a. Analyze defaulted loan data to identify defaulter characteristics

II. Early stages of enrollment

a. Early identification and counseling for students at risk

b. Financial literacy education for borrowers

III. Late stages of enrollment

a. Exit counseling

IV. After students leave school

a. Early Stage Delinquency Assistance (ESDA)

b. Late Stage Delinquency Assistance (LSDA)


Research OverviewThe best way to help students is to analyze historical data to identify trends in student success.

We study the past to predict the future.

• The process includes:

• Identifying the appropriate student variables

• For each student identifying a measure of success. (Persistence, graduation, gainful employment, successful student loan payment, etc.)

• Identifying patterns, profiling students most likely to be at-risk

• Creating intervention and support programs

• Tracking the success of the intervention programs


29

Questions An Analysis Can Answer

Each school’s situation is unique. However, these are questions to be answered:

• What is your current Cohort Default Rate? Is it trending up or down?

• How do you compare with peer institutions?

• Which majors or academic programs have the most defaulters?

• Do in-state or out-of-state students default at a higher rate?

• Does financial aid packaging correlate to defaulting?

• How does retention relate to default rate? Are retention programs working?

• If you have limited resources, which students should be targeted to lower the default rate?

• What is the impact of your default prevention efforts and how can you track the effectiveness of these programs?


Sample Findings

30

31

Sample Summary of Key Findings• The number one issue in student loan default is Retention of

Students. Students who do not graduate are over twice as likely to default on student loans.

• The analysis shows that a critical point for retaining students is 24 credit hours. If a student persists beyond this point they are significantly less likely to default.

• Athletes are having a major impact on Cohort Default Rates. A fifth of all defaulters are athletes. Excluding athletes, the school’s CDR drops by several percentage points.

In each case, the school thought it knew what the issues were. Inceptia gave them quantified information they could act on.


32

Student Experience | Graduation

Graduation# Entering Repayment

% of Total

Graduated 435 58%

Did not graduate

312 42%

Total 747 100%

Graduated58%

Did Not Graduate42%

All cohort borrowers had a respectable graduation rate of 58 percent.

EXAMPLE REPORT PAGE


33

Student Experience | Graduation

# Entering Repayment

% of TotalBorrowers in Repayment

N=637

Borrowers in Default

N=110

Graduated 435 58% 62% 21%

Did not graduate 312 42% 38% 79%

Total 747 100% 100% 100%

Graduation status is a major variable in predicting default. Defaulters are over twice as likely to drop out than are repayers.

EXAMPLE REPORT PAGE


34

Student Experience | Credits Completed

Credits Completed# Entering Repayment

% of Total

0 to 9 62 8%

10 to 24 60 8%

25 to 39 70 9%

40 to 54 52 7%

55 to 69 45 6%

70 to 84 38 5%

85 to 99 30 4%

100 or more 396 53%

Total 747 100%100 or more

85 to 99

70 to 84

55 to 69

40 to 54

25 to 39

10 to 24

1 to 9

53%

4%

5%

6%

7%

9%

8%

8%

EXAMPLE REPORT PAGE


35

Student Experience | Credits Completed

Credits Completed# Entering Repayment

% of TotalBorrowers in Repayment

N=637

Borrowers in Default

N=110

0 to 9 62 8% 8% 25%

10 to 24 60 8% 9% 16%Cumulative 0 to 24 credits 123 16% 17% 42%

25 to 39 70 9% 11% 9%

40 to 54 52 7% 8% 7%

55 to 69 45 6% 7% 10%

70 to 84 38 5% 6% 6%

85 to 99 30 4% 5% 6%

100 or more 395 37% 45% 19%

Total 747 100% 100% 100%

The data clearly shows that 24 credits is a critical point in the student experience. The largest portion of Defaulters completed less than 24 credits. Intervention programs need to start early in the student experience.

EXAMPLE REPORT PAGE


36

Student Background | Athletics

Athletes# Entering Repayment

% of Total

Athletes 54 7%

Non-athletes 693 93%

Total 747 100%

Athletes7%

Non-athletes93%

EXAMPLE REPORT PAGE


37

Student Background | Athletics

% of Total

Entering Repayment

N=747

Non-defaultersN=637

DefaultersN=110

Athletes 7% 5% 19%

Non-athletes 93% 95% 81%

Total 100% 100% 100%

• Athletes accounted for a disproportionate share of college’s defaulters.

• Without the athlete defaulters, college's overall default rate would have been 12 percent instead of 15 percent.

EXAMPLE REPORT PAGE


Sample Variables

38

Student Variables

A student’s experience in higher education can be broken out into three categories.

• Student background upon entry• Financial Aid• Student experience while enrolled and after leaving


40

Methodology - Variables

Student Background Variables•First-generation status

•ACT score

•SAT scores

•Other placement tests

•Remedial courses needed/completed

•Entry date

•Age at entry

•Type of student – first-time freshman, transfer

•Full time/part time

•Gender

•Ethnicity

•Marital status


41


Financial Aid Variables• Financial aid awarded

• Types of aid

• Amount of aid

• Expected family contribution

• Family income

• Dependency status


42


Student Experience Variables

• Academic major

• Academic minor

• Credits attempted

• Credits completed

• Cumulative GPA

• Core GPA

• Graduation status

• Highest grade level completed

• Number of terms completed

• Living arrangement

• Last day of attendance

• Student loan repayment/default


How can you help the student?

1. Analysis of data – identify the likely at-risk students

2. Provide Financial Education and Counseling• Budgeting skills• Paying for college – managing finances• Preparing for loan repayment

3. Monitor at-risk student progress in school

4. Watch for the warning signs

5. Build a plan to measure results

6. Provide loan repayment counseling upon exit


44

Questions?

CONTACT INFORMATIONBrenda McCaffertyStrategic Business Director

601.504.4960

[email protected]

inceptia.org

Documents

The Real Price of Student Loan Defaults NMASFAA March, 2012 Brenda McCafferty, Strategic Business Director