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Shoptalk 526, October 20, 2009

Policy Resources

Revisiting a classic Dear Colleague Letter on default prevention

With the upcoming transition from a two-year to a three-year cohort default rate (CDR) mandated by the Higher Education Opportunity Act (HEOA), schools may be thinking about what sorts of default prevention activities and techniques they can implement on their campuses before the first three-year rate is published in 2012.

Along with the transition to a three-year CDR, the HEOA also requires a school to establish a default prevention task force the first time the school's three-year CDR equals or exceeds 30 percent. The task force must prepare a default prevention plan that will:

  • Identify the factors causing the rate to be 30 percent or greater;
  • Establish measurable objectives and steps to improve future rates; and
  • Specify actions that can be taken to improve student loan repayment, including counseling regarding loan repayment options.

But TG encourages all schools, even if they do not believe they will be significantly affected by this requirement, to more proactively assist their students in successfully repaying their loan obligations. Revisiting ED's Dear Colleague Letter (DCL) GEN-05-14 may be a solid first step in that process. An "oldie but a goodie," this letter announces ED's revised sample default prevention and management plan. The sample plan discusses regulatory requirements and suggested activities, which are categorized by enrollment — the early stages of enrollment, late stages of enrollment, and after students leave school. The DCL also provides sections on enhanced entrance and exit counseling and tools and activities for schools.

Early stages of enrollment
Regulations require that first-time borrowers of FFELP and FDLP Stafford and Grad PLUS loans receive entrance counseling. The regulations also specify what topics must be covered during the counseling session. ED also recommends that schools provide financial literacy for borrowers, and encourages schools to provide financial literacy resources "at various stages of enrollment" and "at a minimum, at enrollment and following graduation or withdrawal."

Early identification and counseling for "at-risk" students is another early stage activity identified in the DCL:

Students at-risk generally refers to borrowers who withdraw prematurely from their educational programs, borrowers who do not meet standards of satisfactory academic progress, or both. Counseling at-risk borrowers should focus on the causes of withdrawal or unsatisfactory academic progress and solutions to resolve these matters. The end result of working with at-risk students will be more borrowers completing their educational programs, equating to a higher retention rate for the school and lower numbers of defaulted borrowers.

Communication across campus is another vital component of any default prevention plan. School communication procedures should be reviewed to ensure that they effectively relay relevant information, since doing so "not only ensures the right aid is getting to the right student, but such communication will help schools comply with regulations regarding the school's standards of administrative capabilities, accurate and timely reporting of borrowers' enrollment status, and satisfactory academic progress."

The DCL also states that having dedicated default prevention and retention staff has proven effective at many schools in that relationships with students may be nurtured from the time of enrollment to entering repayment. Where resources are limited, ED recommends combining these two functions into one position.

Late stages of enrollment
ED emphasizes that when providing exit counseling, it is essential to provide "[i]n-depth counseling that focuses on fully explaining repayment plans and choices that fit the borrowers' needs."

Borrowers who withdraw before completion of their program of study have the highest risk of default and, if possible, should be reached while still on campus. Quick identification of these borrowers and timely assistance to help resolve the issue(s) that prompted the withdrawal can enhance student retention as well as lower rates of default. ED asks that schools "consider offering job placement services for a limited timeframe to students who have withdrawn. In addition to providing a valuable service, schools can take advantage of the borrower's return to campus to provide counseling. Note that an employed borrower, even one earning less than if he/she had completed school, is better able to make loan payments than an unemployed borrower."

After students leave school
While required by regulation for all schools, timely and accurate enrollment reporting also promotes student success by ensuring that borrowers receive the benefit of the full grace period so that loan servicing contacts may be made at the appropriate time and in the proper order. ED states "[t]here is a direct correlation between late or inaccurate enrollment reporting and loan defaults" and recommends "a monthly schedule of reporting changes in enrollment status."

To assist in maintaining accurate borrower enrollment reporting, schools can request a Date Entered Repayment (DER) Report from the National Student Loan Data System (NSLDS). The DCL recommends that schools compare the DER Report to its own records on a bi-monthly basis, and notes that "[r]eviewing the DER Report will result in more accurate data, assuring that borrowers enter repayment in the correct cohort year and that schools receive accurate CDRs."

The DCL also recommends Early Stage Delinquency Assistance (ESDA), "a highly focused effort by lenders, guarantors, and schools ... to provide ... enhanced loan counseling, borrower education, and personal support during the grace period" to help certain borrowers, such as those who leave school before completing their program, who carry a higher risk of later default. In addition to ESDA, schools should use default aversion assistance offered by guarantors and similar assistance from the Direct Loan Servicer for borrowers who are at least 60 days delinquent.

Late Stage Delinquency Assistance (LSDA) may help borrowers who are more than 240 days delinquent. Schools can act as liaison between delinquent borrowers and guarantors or the Direct Loan Servicer by simply contacting borrowers — for example, by phone or e-mail a few times per month — and informing them that they have options and that the guarantor or servicer is a resource to help them.

It is clear that maintaining contact with former students is critical for successful implementation of many of these strategies. Cell phone numbers, e-mail addresses, and contact information from a variety of family members all contribute to maintaining contact. ED suggests that "[a]llowing borrowers to continue to use school e-mail accounts after they have left campus is ... a quick, easy, and effective method of contacting them."

All schools, regardless of their CDR, should review the data in their NSLDS Loan Record Detail Report to ensure accuracy and that the calculation was based on the correct borrowers and loans. "It is the school's responsibility to challenge incorrect data reflected in their draft CDR, or request an adjustment, or submit an appeal or inaccurate data as reflected in their official CDR."

ED recommends identifying common defaulter characteristics, which may include "key information such as high school attended, program of study, demographics, grades, etc." By using the results of this analysis to improve the school's procedures, practices, and default prevention plan, "[s]chools promote success by taking preventive measures to correct ineffective practices thereby preventing current and future borrowers from experiencing the same difficulties that plagued past defaulters."

Enhanced entrance and exit counseling
In addition to the required components of entrance and exit counseling, ED recommends:

  • Requesting cell phone numbers and e-mail addresses and family references beyond the items on the loan application during entrance counseling, and requesting updated information during exit counseling;
  • Including repayment information, such as the borrower's estimated monthly income that the borrower can reasonably expect to receive in his or her first year of employment, estimated total loan balance upon program completion, and lender(s) contact information; and
  • Providing reminders of personal finance management, such as maintaining contact with lender(s) and/or loan servicer(s), and other financial literacy information.

Tools and activities for schools
ED also provides recommended online resources to help schools with loan counseling, enrollment reporting and data accuracy, default prevention, and general publications.

For more information about default prevention
TG provides links to ED's CDR resources in one convenient place. For more information about the HEOA's impact on CDR calculations and the transition to three-year rates, see TG's archived webinar "Managing Your Cohort Default Rate" at www.tgslc.org/training/webinars/webinars1005.cfm.

The complete DCL is available on the Information for Financial Aid Professionals (IFAP) Web site at http://ifap.ed.gov/dpcletters/GEN0514.html. If you have questions, please contact TG customer assistance at (800) 845-6267, or send an e-mail message to cust.assist@tgslc.org.

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