Student Loan Defaults in Texas: Yesterday, Today, and Tomorrow

Strategic Default Initiative Revisited

On April 25, 1988, leaders in the Texas student aid community gathered to discuss the emerging issue of student loan defaults. This group produced one set of general recommendations and six sets of recommendations corresponding to the interest sessions at the conference. In all, there were 203 recommendations. A list of these recommendations can be found in Appendix A. This appendix also includes a description of what has happened with each recommendation since 1988.

General Recommendations

The conferees had seven major recommendations:

  1. All participants in the Federal Family Education Loan Program (FFELP) must engage in better, more effective communication with one another.
  2. The Congress should appropriate funding to the Department of Education (ED) to begin immediate development of the National Student Loan Data System to centralize borrower tracking.
  3. Schools, lenders and guarantors should provide more information to student borrowers on their repayment responsibilities upon entry to college.
  4. Borrowers should be contacted by the appropriate parties during the six-month grace period after leaving school and before repayment begins to remind them of their repayment obligations.
  5. Borrowers should be required to make nominal payments on their loans while still in school in order to allow them to become accustomed to making payments.
  6. Both the state and federal legislative bodies must provide more need-based grant funding in order to reverse the growing imbalance of loan assistance over grant assistance in the student aid program. Too many high-risk students are forced to rely too heavily on loans to finance their postsecondary educations, creating a problem of student debt burden among low-income student borrowers.
  7. Students must be made aware by the lender and school financial aid office that a Guaranteed Student Loan is a loan — not a gift — that must be paid back by the student. This point cannot be stressed too strongly.

The imperative to improve communications was a clear message of the 1988 conference. The industry has responded in a variety of ways. TG has increased the number of its reports to schools and lenders; revamped its regulatory newsletter; provided information to students and student loan industry participants via the Internet; and offered opportunities for face-to-face communications through workshops, conferences, industry meetings and the TG Lender/School Advisory committee. The move towards the Common Manual and standardization of forms has made communication easier. Schools are more involved with informing students of their loan obligations and lenders actively participate in college nights and outreach efforts. Technological changes and competition with direct lending has brought participants closer together.

Communication among participants was also enhanced by the creation of the National Student Loan Data System (NSLDS). After years of administrative delays and no appropriations, money was finally appropriated and the first loans were loaded onto the system in November of 1994. Schools, lenders, and guarantors participated in improving the quality of the data that populated this database. All FFELP loans active as of October 1, 1989, were initially loaded onto the system. Direct loans, Perkins loans, Pell overpayments, and loans held by ED’s Debt Collection Service followed. Monthly updates from guarantors, schools, the Direct Loan servicer, other Title IV systems, and lenders and servicers, keep data current. NSLDS now contains over 100 million loans for 37 million students. The system is used to pre-screen and post-screen student aid applications, calculate Cohort Default Rates, maintain the Student Status Confirmation Reports (SSCR) process, produce Student Aid Reports (SAR) and Institutional Student Information Records (ISIR), provide Financial Aid Transcript (FAT) data, and support Borrower Tracking.

The conference participants recommended that schools conduct entrance counseling sessions with student borrowers. On August 24, 1989, Congress required entrance counseling for all first-time borrowers. Schools have refined this process over the years, but concerns remain about the level of receptivity of students for this information at matriculation.

The fourth recommendation stated the need for more information for students during their grace period. Borrowers now receive far more information on their loans at the end of their educational careers than they did in 1988. In 1992, Congress required exit counseling for all borrowers. With assistance from TG, schools maintain closer contact with borrowers entering repayment and frequently have hired default prevention coordinators and consultants to facilitate this effort. In the fall of 1996, TG developed a student loan inquiry system on the Internet as an additional way that students can learn more about the current status of their loans.

The conferees recommended that students make nominal payments on their loans while still in school. The rationale was that it would develop good habits and help maintain lender contact. However, Congress has never required nominal payments. Detractors argued that it would be administratively burdensome and expensive to implement such a plan.

The sixth recommendation called for an increase in need-based grant aid. The conference participants saw too many students from low-income families rely heavily on loans despite the risks involved. Since FY 1989, need-based grants in Texas (state and federal) rose from $294 million to $442 million in FY 1996. Most of this increase came from the federal government that grew its need-based grants from $248 million in FY 1989 to $346 million in FY 1996. The State of Texas increased its need-based grants from $46 million in FY 1989 to $96 million in FY 1996. Unfortunately, college costs rose more quickly forcing greater numbers of students to borrow more heavily to finance their education. While Congress and the Texas Legislature have authorized even greater increases in grants, it is common to find appropriations failing to meet the higher authorization levels.

Responding to the perception that students confused loans with grants, conferees strongly recommended that all student loan participants stress to students the very real differences. This message was heard. In 1989 and 1992, the federal government required entrance and exit counseling and the provision of other consumer information for student borrowers. Schools, lenders, and TG have made great efforts to instruct students about the obligations that accompany their student loans.

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Administrative Practices

Improving communications was the focus of the recommendations from the Administrative Practices interest session. The group recommended the development of entrance and exit counseling programs to communicate to the student the obligations that accompany the borrowing of a student loan. Regular contact with borrowers, especially during the grace period, was also suggested. The group called on guarantee agencies to provide more and better information to schools to help them participate in default prevention activities. Schools were urged to hire default prevention coordinators and refrain from using commissioned recruiters. Conferees recommended that schools be paid an administrative allowance for doing default prevention activities.

While schools never got an administrative allowance for default prevention activities, most of the other recommendations from this interest session are now either required by law or have become standard practice within the student loan industry. Entrance and exit counseling sessions are mandated and schools fulfill this function in a variety of ways, such as group and individual counseling sessions, videos, and interactive software. Due diligence requirements ensure that borrowers are contacted while in grace and when their loan is sold. TG now provides schools and lenders with several reports which enable more active default prevention activities. Schools often have staff or contractors help them with this function.

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Pre-loan Counseling, Packaging, Early Financial Planning

To minimize defaults, this session was interested in controlling the amount of loans students should borrow. They urged adjusting financial aid packages so that first- and second-year students would be more likely to have grants than loans, i.e. “front loading” grants. This group suggested prorating loan amounts based on academic progress, enrollment status, and career prospects. Recommendations were made to protect the lenders’ investments by requiring credit checks, co-signers, and the purchase of a savings bond equal to the amount of the loan with the guarantee agency or federal government as the primary beneficiary.

Since 1988, a few of these proposals were adopted. Many schools try to front load grants to first- and second-year students. However, the lack of sufficient federal and state grant money makes this strategy challenging in Texas. Loan limits are now much more differentiated based on academic progress with first-year students eligible for much less in loans than upperclassmen. While this keeps indebtedness low for those most at risk of defaulting, it also puts significant financial barriers on schools to find grant money for students unable to borrow as much money as they need. Schools may soon gain additional authority to control borrowing amounts. Both the U.S. Senate and House reauthorization bills now under consideration would grant financial aid administrators more authority to use professional judgment to limit the amount that some students can borrow. However, Congress has yet to approve credit checks (except for PLUS borrowers), co-signers, and the purchase of savings bonds by students. These were viewed as being in conflict with the equal education access goals of the program.

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State and National Legislative Initiative

Many of the proposals from the State and National Legislative Initiative session were designed to limit borrowing by high-risk students, especially unproven first-year students who drop out soon after enrolling. The focus seemed to be directed primarily at proprietary schools as the conferees requested different guidelines for different types of schools. There were also recommendations to alter the formula for calculating default rates to account for schools with students from less affluent families and to give credit for student payments made after default. State directed proposals called for measures to increase the incentives for repayment.

The federal government’s response to the default issue of 1988 seemed in line with many of the conference recommendations. While Congress did not adopt proposals to front load grants in the first two years, it did identify the unproven, potential first- year dropouts as a group for which loans are inappropriate. Late disbursements, multiple disbursements, increased professional judgment and no increase in loan limits for first-year students are among the legislative efforts to minimize the amount of debt for high-risk students. The federal government has mostly resisted attempts to treat schools differently based on their school sector. Efforts to alter the cohort default rate formula have not been very successful, although schools may appeal their rates based on exceptional mitigating circumstances. The State of Texas passed several measures to bolster TG’s ability to collect on loans. Blocks on professional and drivers’ licenses and holding transcripts were among the items adopted in TG’s “sunset” legislation in 1989.

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Debt Management

The Debt Management session focused on instilling good repayment habits and raising students’ awareness of their loan obligations. This group also recommended changes to minimize problems associated with multiple holders of loans.

Award notices now go to borrowers each academic year informing them of what aid they have received and what obligations they have incurred. One credit hour courses in debt management are not required as was proposed by this session nor are payments required while students are in school. However, more means of gaining information about the current status of one’s loans are available. TG’s Student Loan Inquiry makes current status and balance of loans available via the Internet and TG’s Customer Assistance staff works hotlines to answer questions from students. While multiple holder issues are still with us, loan consolidation is much more popular in 1998. The student loan industry has also been pushing ED to approve line of credit proposals and other modernization measures. Some lenders encourage good repayment habits by rewarding those who make consecutive payments with discounts on their interest charges. However, lenders may be limited in their ability to continue this practice if the amount of their subsidy is reduced as scheduled in current law.

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Servicers - The Parties Involved, Keeping Everyone Informed

As with many of the sessions, communication was the key for this group. Several areas were identified as in need of improvement:

  • Reporting out-of-school dates
  • Notifying schools and borrowers when a loan is sold
  • Responding quickly to requests for deferments
  • Sending schools Request for Assistance (RFA) reports
  • Communicating electronically
  • Sharing data across state agencies
  • Reducing miscommunication by requiring borrowers to use only one lender.

The process for reporting out-of-school information has been improved with the establishment of the NSLDS. The quality of the information has improved and updates are more frequent. Also the sellers and buyers of loans are now required to inform borrowers when their loans have been sold. Deferments are much easier to get with the nearly automatic check off option that relieves students of having to request specific forms to get deferments. Also, TG provides information on deferments to borrowers through the Internet and through Customer Assistance hotlines. RFA reports are routinely sent to schools. TG has made many reports and data available electronically through Tex-Net, the Internet, and other means. TG’s sunset legislation in 1989 required state agencies to cooperate with TG and many routinely do. Licensing boards and state agencies, including the Texas Department of Motor Vehicles, share information with TG. TG's Project Merge encouraged keeping borrowers’ loans with one lender, although the need to protect a student’s choice in the selection of lenders has not been jeopardized.

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Loan Servicing - The Process: Due Diligence, Student Status Deferments, and Skips

Not surprisingly, improving communication was seen by this session as critical to reducing defaults. This group recommended the exploration of new and creative ways to communicate with borrowers and other student loan partners. Borrowers, this group suggested, should have access to numerous avenues of information from guidebooks to student associations. This group urged lenders and guarantee agencies to use a more diversified set of letters in corresponding with borrowers and to make telephone contact more frequent. Interagency agreements should be developed, this group argued, including the creation of a statewide skip tracing agency, which would not only find delinquent borrowers, but could also locate parents late with their child support. The Loan Servicing session also sought ways to discourage delinquency such as publishing the names of defaulters in local papers and posting “most wanted” leaflets on campus with the names of students who have failed to fulfill their loan obligations.

With the growth of the Internet and electronic communications, schools, lenders, and TG have incorporated the new technologies into their communications strategies. Borrowers can access their loan information over the Internet through TG’s Student Loan Inquiry feature. Forms can be downloaded from the World Wide Web and borrowers can receive email reminders of key dates in the student aid process. Students can call hotlines to talk to customer assistance experts or they can still use a stamp and write their school, lender, or guarantee agency. The State of Texas did not create a skip tracing agency, but TG has numerous agreements with state agencies — including the Attorney General’s Office and the State Comptroller’s Office — which promote the sharing of information electronically. Although there has been some experimentation, lenders and TG are limited by the Fair Debt and Reporting Act in the ways in which they can contact borrowers.

A large percentage of the recommendations of the SDI conference have been adopted.1 Many of these proposals have been quite effective in better informing the student, minimizing the risk of borrowing, improving communication among student loan participants and providing proper incentives for repayment of student loans. Other recommendations may have conflicted with other program goals such as equal access to higher education, procedural simplicity, and cost efficiency. The next section will document some of the key trends in student loans since the 1988 conference. As will become clear, many of the changes in law and administrative practice had a significant impact on patterns of student borrowing.

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