Student Loan Defaults in Texas: Yesterday, Today, and Tomorrow
Introduction
The Texas student aid community came together in 1988 to address the issue of defaults in the guaranteed student loan program. Defaults had just emerged as a national issue. Then Secretary of Education, William Bennett, had highlighted the issue by recommending the elimination of Title IV student aid eligibility for schools with cohort default rates above 20 percent. The Secretary’s comments - and threats - caused an uproar throughout the student aid community. Yet Secretary Bennett had drawn attention to the escalation of defaults. At the time, the Texas Guaranteed Student Loan Corporation (TG) had seen its default claims grow from $7 million in FY 1984 to $70 million in FY 1988. These numbers had human consequences; more and more students were finding their education dreams shattered by their experience with inferior schools, leaving them with huge debts and ruined credit. Texas financial aid officers, lender representatives, and state and federal policymakers joined in an effort to better understand this environment and to search for solutions to some of the deficiencies in the student loan system. Labeled SDI to associate its importance with the Reagan Administration’s Strategic Defense Initiative (aka Star Wars), the 1988 default conference was a turning point in student aid administration in Texas.
Ten years later the student aid community returns to the issue of defaults. On June 8, 1998, these same groups of student aid officials will meet again to learn more about the current status of defaults and to share ideas on ways to prevent defaults. This report is designed as a resource for conference participants as well as others interested in the topic. It attempts to update the status of the recommendations made at the 1988 conference and to clarify the latest research on defaults in Texas. The paper consists of five sections:
- Section I: Introduction
- Section II: Strategic Default Initiative Revisited
- Section III: Historical Trends
- Section IV: Predicting Borrowers Who Are Most Likely to Default
- Section V: Policy Implications
“Section II: Strategic Default Initiative Revisited” reexamines the recommendations from the 1988 Strategic Default Initiative conference. These recommendations are divided into seven sections:
- General Recommendations
- Administrative Practices
- Preloan Counseling, Packaging, Early Financial Planning
- State an National Legislative Initiative
- Debt Management
- Servicers - The Parties Involved, Keeping Everyone Informed
- Loan Servicing - The Process — Due Diligence, Student Status Deferments and Skips.
Over the course of the 1988 conference, participants divided into six interest group sessions and came up with 203 recommendations. As you will see, Congress enacted many of these recommendations and/or the student loan industry adopted them as standard practice. Appendix A provides a detailed review of each recommendation. Section III shows the effect of these measures in Texas.
“Section III: Historical Trends” traces the development of student aid and the guaranteed student loan program in Texas. Since 1988, the guaranteed student loan program has grown tremendously. Greater oversight and changes to loan limits have shifted TG’s portfolio away from the proprietary school sector and towards 4-year public and private colleges. Default rates have dropped and more students have gained access to higher education through a reliance on student loans. In fact, the magnitude of the increased borrowing has heightened concern about student loan indebtedness and its possible effect on defaults. As Section IV shows, greater indebtedness is one of many indicators associated with a propensity to default.
“Section IV: Predicting Borrowers Who Are Most Likely to Default” is a thorough examination of the traits or indicators associated with defaulting. Using logistic regression analysis, certain key predictors were found to be statistically significant holding all other traits constant. The results of this analysis allow for a very reliable prediction of which students are most at risk of defaulting. The results shed light on ways of preventing default and make it possible to target default prevention efforts on those most in need of assistance. This quantitative analysis was supplemented by in-depth telephone interviews with borrowers who have left school. The results of these interviews provide additional knowledge into the nature of defaults and let us supplement the quantitative model by looking into the more human elements of the lives of students after they have left school. The quantitative model and the in-depth interviews deepen our understanding of defaults. This knowledge can help us devise more successful ways to prevent defaults.
“Section V: Policy Implications” discusses some of the ramifications of the quantitative research supplemented by in-depth interviews with former student borrowers. These policy implications are understood within a historical context that was shaped, in part, by the actions taken as a result of the 1988 Strategic Default Initiative conference.