Transcript Presentation Title

MANAGING STUDENT DEBT,
DELINQUENCY, AND DEFAULT
VASFAA Annual Conference
Eric K. Johnson
MAY 22, 2012
Confidential and proprietary information © 2012 Sallie Mae, Inc. All rights reserved.
Topics
►
Current market conditions
►
Cohort default rate (CDR) overview
►
Gainful employment (GE) loan repayment rate
(LRR) overview
►
Non-CDR performance metrics
►
Best practices to manage education loan debt,
delinquency, and default
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Current Market Conditions
►
Transition from FFELP to FDLP (ED-servicing)
– Elimination of guarantors’ default aversion and financial literacy efforts
– Palpable student borrower confusion over “split-servicing”
►
Greater regulatory scrutiny and legislative considerations
–
–
–
–
–
►
3-year CDRs and the publishing of “trial” rates
Higher Education Act of 2008: “…life of cohort default rates…”
Gainful employment (GE) regulation and loan repayment rate (LRR) metric
90/10 ratio considerations
Consumer Financial Protection Bureau (CFPB) oversight
New student borrower risk profile
– Unprecedented levels of average student-borrower indebtedness (ABI)
• Proliferation of private credit borrowing and other consumer debt
– Distance and online learning has created a more “transient” student
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Bloomberg Article – March 22, 2012
Student-Loan Debt Reaches Record $1 Trillion, Report Says
By Janet Lorin
U.S. student-loan debt reached the $1 trillion mark, as young borrowers
struggle to keep up with soaring tuition costs, according to the initial findings of
a government study.
The figure, which is higher than the country’s credit-card debt, was probably
reached “several months ago,” Rohit Chopra of the Consumer Financial
Protection Bureau, said in a posting yesterday, excerpted from a speech he
made at the Consumer Bankers Association meeting in Austin, Texas.
“…Federal student-loan debt isn’t growing just with new originations,” he said.
“With so many borrowers unable to keep up with interest payments, debt is
growing even for many who have left school…”
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Student Loan Debt
►
Undergraduate Students
– Average student loan debt for 4-year undergraduate students
was $23,186
– Average student debt of those applying for federal student aid
was $24,651
– >86% of 4-year undergrad student applying for federal student
aid borrowed money to attend college
• 25% borrowed >$30,500
• 10% borrowed >$44,600
►
Graduate Students
– Median increment debt:
• Master’s Degree: $25,000
• Doctoral Degree: $52,000
• Professional Degree: $79,800
Source: http://www.finaid.org and http://nces.ed.gov based on AY 2007-2008 data
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Student Outreach Solutions
Cohort Default Rate (CDR)
Overview
6
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Cohort Default Rate (CDR) Formula
For each school (FY2012 example):
# of student borrowers who entered default in FY2012, FY2013, and FY2014
# of student borrowers who entered repayment in FY2012
=
FY 2012 Cohort Default Rate (x.x%)
NOTE: Federal fiscal year (FY) = October 1 to September 30
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Cohort Default Rate (CDR)
►
►
►
CDR is the percentage of a school’s student borrowers (with
Stafford, SLS, and select consolidation loans) who enter repayment
and default by the end of the next two (2) federal fiscal years
A key performance indicator (KPI) relating to a school’s default
aversion and student preparedness efforts
“Draft” CDRs are released to individual schools in February
– A school can issue a formal “challenge” in an attempt to reduce its CDR
by illustrating data errors
• Data errors can be a result of inaccurate repayment start dates, incorrectlyreported defaults and/or student-borrower “dispositions”
• Servicer due diligence violations
• Abbreviated grace period
►
“Final” CDRs are published nationally each September
– “Trial” 3-year CDRs are published as well
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Benefits of Favorable CDRs
►
Schools with CDRs of 15% (formerly 10% under
the 2-year formula) or less are eligible to
receive special benefits from the U.S.
Department of Education (ED) such as:
– Regulatory relief
• Single disbursements within a semester
• Loan delivery to first-year students before the 30-day
window
– Other benefits
• The former “school-as-lender” option was only available
to schools that recorded favorable CDRs
– Other ED-awarded benefits will likely use similar CDR-related
criteria
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Consequences of Unfavorable CDRs
►
Loss of Title IV eligibility (accessibility to federal student
aid)
– For schools that post CDRs of 30% or more for three (3)
consecutive years
• Formerly 25% under the 2-year CDR formula
– For schools that record a CDR of 40% for one (1) year
►
Possible loss of potential students (and revenue)
►
Reputational and headline risk
►
Risk of losing access to private loan capital
– Eligibility and funding limits
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Historical Student Loan Default Rates (Source: ED)
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CDRs (2-year formula) By Institution Type
FY 2007
Institution
Type
Public
FY 2008
FY 2009
# of
Borrower
# of
# of Borrowers
Borrower
# of
Borrowers
Borrower
# of
# of Borrowers
# of
Default Borrowers
Entered
# of
Default Borrowers Entered
# of
Default Borrowers
Entered
Schools
Rate
Defaulted
Repayment Schools
Rate
Defaulted Repayment Schools
Rate
Defaulted
Repayment
1,614
5.9%
102,919
1,721,629
1,618
6.0%
104,292
1,720,664
1,627
7.2%
128,121
1,778,903
144
7.5%
595
7,832
145
6.7%
523
7,736
142
9.9%
749
7,548
2-3 yrs
846
9.9%
48,287
483,721
848
10.1%
49,331
487,436
855
11.9%
62,234
520,256
4yrs(+)
624
4.3%
54,037
1,230,076
625
4.4%
54,438
1,225,492
630
5.2%
65,138
1,251,099
Private
1,718
3.7%
29,558
778,296
1,702
4.0%
30,620
761,129
1,706
4.6%
38,718
825,221
Less than 2 yrs
46
12.6%
449
3,538
45
14.1%
537
3,794
43
14.5%
605
4,148
2-3 yrs
188
8.1%
1,204
14,798
180
8.2%
1,167
14,157
172
10.0%
1,507
15,039
4yrs(+)
1,484
3.6%
27,905
759,960
1,477
3.8%
28,916
743,178
1,491
4.5%
36,606
806,034
Proprietary
2,008
11.0%
92,731
838,328
2,118
11.6%
103,764
889,034
2,147
15.0%
152,862
1,015,855
Less than 2 yrs
1,039
12.0%
15,603
129,627
1,105
12.4%
15,418
123,454
1,110
13.7%
18,031
130,936
2-3 yrs
702
12.5%
33,030
262,640
723
12.6%
34,538
272,215
732
14.8%
42,893
289,546
4 yrs(+)
267
9.8%
44,098
446,061
290
10.9%
53,808
493,365
305
15.4%
91,938
595,373
Foreign
435
2.2%
163
7,276
421
2.2%
176
7,902
425
5.5%
493
8,862
1
0.0%
0
5
1
0.0%
0
5
1
0.0%
0
5
5,776
6.7%
225,371
3,345,534
5,860
7.0%
238,852
3,378,734
5,906
8.8%
320,194
3,628,846
Less than 2 yrs
Unclassified
Total
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2- to 3-year CDR Analysis (Source: BridgeSpan Financial/ACS)
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Student Outreach Solutions
Gainful Employment Loan Repayment Rate (LRR)
Overview
14
Confidential and proprietary information © 2012 Sallie Mae, Inc. All rights reserved.
Student Outreach Solutions
Loan Repayment Rate (LRR) Formula
Payments-Made Loan (PML) + Loans Paid in Full (LPF) ($) during FY2012
Original Outstanding Principal Balance (OOPB) ($) of loans from Student
Borrowers who entered repayment in FY2008 and FY2009
=
FY 2012 Loan Repayment Rate (x.x%)
NOTE: Federal fiscal year (FY) = October 1 to September 30
15
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Gainful Employment (GE)
►
For private-sector schools and all certificate programs
►
Loan repayment rate (LRR) is a new key performance indicator that
ED designed to complement CDR
– Arguably the easiest GE metric to positively influence
– Introduced in 2011 to motivate successful repayment of student loans
– LRR is based on dollars ($); whereas, CDR is based on number (#) of
student borrowers
– Certain repayment options like deferment (on unsubsidized loans) and
forbearance can simultaneously help a school’s CDR and impair its LRR
►
Schools can exhibit gainful employment in one (1) of three (3) ways:
– Loan repayment rate (LRR) must be = to or > than 35%
– Debt-to-income ratio must be = to or <12%
– Debt-to-discretionary income ratio must be = to or <30%
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Loan Repayment Rate (LRR)
►
LRR is demonstrated when student borrower’s:
– Loan balance (P&I) is reduced by at least $1.00 over the fiscal year
– Loan is paid-in-full
– Loan is on track to being forgiven due to public-service employment
• Making payments under an interest‐only or income‐based repayment plan (IBR) (subject to
the 3% cap/anti‐abuse limit)
• In a graduate program and his or her loan is a consolidation loan and all interest accrued
over the course of the year has been paid
►
LRR measures student borrowers in the third and fourth years of
repayment with two (2) exceptions:
– If there are 30 or fewer borrowers
• In this 2‐year period, the period is expanded to include student borrowers in the third,
fourth, fifth, and sixth years or if there are still 30 or fewer student borrowers
• In this 4‐year period, the program is considered to pass the measure
– If the program is a medical or dental program
• It only includes student borrowers in their sixth and seventh years to accommodate typical
internship and residency periods
►
Institutions can correct LRR data using a process similar to one used
to challenge CDRs
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Critical Dates Relating to Loan Repayment Rate (FY2014 Example)
Loan Repayment Rates (LRR)
Released by U.S. Department of Education (ED)
Measures repayment activity during
Student borrowers who enter repayment during
Programs with small amount of students
Medical and dental programs
Critical Dates
Early 2015
FY2014
FY2010 and FY2011
FY2008, FY2009, FY2010, and
FY2011
FY 2007 and FY2008
18
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Other Regulatory Considerations
►
90/10 Rule
– Private-sector colleges can derive no more than
90% of revenues from federal sources (ED)
• GI Bill and Department of Defense (DoD) Tuition
Assistance are part of the 10% portion
• Durbin proposal intends to raise to an 85/15 ratio and
eliminate the so-called “DoD loophole”
– Effective July 2012, the 10% will be determined on
actual loan payments (cash accounting) instead of
using the net present value (NPV)
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Student Outreach Solutions
Default- and Repayment-Optimization
Best Practices
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STUDENT BORROWER DELINQUENCY TIMELINE (FFELP)
STUDENT OUTREACH
SOLUTIONS
Default
Delinquency
Grace
(180 days)
1-60 days
61-150
days
151-270
days
271-420
days
DEFAULT
Collections
FFELP-Loan Servicing
Default claim
filed between
day-270-360
DAAR*
Filed
Default claim
purchased @
~45 days post-claim
Guarantor Default Aversion Services
School’s Default- and Repayment-Management Effort
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STUDENT BORROWER DELINQUENCY TIMELINE (ED)
Delinquency
Grace
(180 days)
1-60 days
61-150
days
Default
151-270
days
271-360
days
DEFAULT
Collections
ED-Loan Servicing
Default
@ day-360
School’s Default- and Repayment-Management Effort
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Sample Workflow
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Delinquency Resolution Sequence
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Best Practices
►
Encourage responsible borrowing
– Entrance counseling, enrollment, and post-enrollment
►
Establish frequent and ongoing communication;
continuously update demographic information at critical
time periods
– Enrollment, post-enrollment, grace, graduation/separation,
repayment
►
Develop formal debt management plan and outreach
program
– Performed internally and/or in collaboration with a third-party
vendor
– Leverage each organization’s strengths
►
Determine “at-risk” student borrower population
– Prioritize work load for most strategic resource deployment
25
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Data Flowchart
Default- and
RepaymentManagement
Team
26
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Student Borrower Risk Factors (examples for illustrative purposes only)
►
In-school status
–
–
–
–
►
Program-of-study
First in family to attend college
Pell Grant Recipient
No transferrable previous education credit
Repayment status
– Withdrawal status
– Presence or absence of valid demographic data to determine skiptrace status
– Account balance
• Note: highest balances do not necessarily translate into the highest default
risk
►
Delinquency status
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Telephonic Outreach
►
Compose telephone scripts/narratives
– Embrace a warm and friendly tone; however, use open-ended questions
(how much, when, etc.)
– Verify demographic information on each contact
– Promote balance-reducing payments and electronic debit account
enrollment for student borrowers who are able to pay
– Offer deferment entitlements and forbearance for student borrowers who
are unable to pay
– Facilitate 3-way conference calls with loan servicers (for pay-by-phone
transactions and verbally- approved forbearance requests)
►
Launch automated and/or manual dialing campaigns
– Prioritize work load (e.g., sorted by fiscal year vintage, delinquency, risk
exposure)
– Provide multiple ways for the student borrower to make inbound contact
(toll-free hotline, E-mail, website, etc.)
– Consider interactive (attended or unattended) messaging
– SMS Texting
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Sample Operational Flow Chart
29
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Operational Best Practices
►
Lettered Outreach
– Craft a letters series (to be delivered via E- and direct-mail) for outreach
during various stages of engagement
• Welcome letter
• Dunning notices (past due)
• Late-stage delinquency letter (quote default consequences)
►
Skip-tracing
– Contact previously-known telephone numbers and addresses
– Use third-party vendor either on a “pay-per-inquiry” or “batch” basis to
source new student borrower demographic information
►
Evaluate and report performance
– Activity-based metrics: telephone right party contacts (RPCs), E-mail
open- and click-through-rates; letters sent, skip-trace activities performed
– Results-based metrics: resolutions (# and $), skip-trace locates, payment
resolutions; delineation of resolution methods, CDR, LRR
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Thank You For Your Time
Eric K. Johnson
President, Student Outreach Solutions, Inc.
Sallie Mae
11100 USA Parkway, Fishers, Indiana 46037
317.348.9119 (t) | 317.450.7063(c)
[email protected]
SallieMae.com
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