The Post-Secondary Loan Crisis
More than one in ten students who entered repayment in financial year 2011 have defaulted on their loans. According to the U.S. Department of Education, the recently released three-year federal student loan cohort default rate – defined as borrowers who default during the first three years of the loan repayment period – is 13.7 percent. Bear in mind, this figure doesn’t even include the borrowers who default more than three years into their repayment period.
The escalating default rate should be of great concern to student borrowers and schools, especially institutions at risk of becoming ineligible for federal funding due to high default rates.
The Association of Community College Trustees (ACCT) and The Institute for College Access and Success (TICAS) set out to discover why the number of student loan defaults is on the rise and what can be done to remedy the issue in their study Protecting Colleges and Students: Community College Strategies to Prevent Default. We encapsulate the findings from Protecting Colleges and Students and other studies below to help you decrease your own school’s default rates.
IN THE BEGINNING
Often, the path to default begins before the student has even decided to borrow. Award letters and packages may play a larger role in student loan amounts (and subsequent defaults) than previously realized.
Better Awarding Practices
Schools participating in the Protecting Colleges and Students study lowered default rates through tactics like suggesting smaller packages of federal loans (rather than the maximum allowable) or asking students to specify the amount they need to borrow. Other effective measures include encouraging students to maximize their Federal Work-Study program before considering loans and to look for grants or scholarships from other organizations.
Teach Them How to Borrow Less
Some students make borrowing decisions without input or advice from parents or have no prior experience with debt. Equip them with as much information as possible to support responsible borrowing, and you will decrease their likelihood of later defaulting. Questions to ask of your financial aid department and corresponding strategies to educate students:
Does the student understand the difference between Direct and Indirect costs? A great avenue for communicating direct versus indirect costs is the award letter. On many schools’ award letters, the prominent information is the indirect costs and unknowing students may choose to accept enough aid to cover all expenses. Instead, help students understand how much money they actually need and suggest budgeting and other ways come up with money for general life expenses.
Does the student have a realistic expectation for post-college salary? Encourage students to research their potential future salaries. This information is readily available on many websites. Or, supply salary averages for programs your school offers. MappingYourFuture.org offers a debt wizard tool that determines an affordable amount of students based on projected salary.
Does your school offer a payment calculator? Help students understand the relationship between loan and payment amounts. Car payment calculators help car buyers determine how much they can afford to borrow. Teach students to work backward similarly. They should only borrow what they think they can afford to repay. FinAid.org has an easy-to-use loan calculator.
Your financial aid department may not be able to advise students on all of these topics, but it would help to have materials – both on the website and printed in office – available to students to educate them on these matters. Assuming they have a source of responsible advice at home or that they will make the best decision is risky business.
Informed Loan Decision Making
Schools in the Protecting Colleges and Students study also battled default through supplemental loan education services, such as in-person or online financial aid advising. These institutions armed students with information through budgeting worksheets that require students to figure their monthly costs and that help them understand their repayment responsibilities.
ALONG THE WAY
Institutions may lower their default rates by being a true partner for students throughout their education by providing support and encouraging communication.
Build Relationship with Students
Authors of Breaking New Ground, presented by The Texas Historically Black Colleges and Universities Default Management Consortium, suggest communication is a key holistic default aversion strategy. Study authors caution that many students default because of lack of information or misinformation as well as a poor relationship between school and students. The study suggests schools reach out with personalized communication to build a rapport with students throughout their time in the program and after.
Completion is Key
Protecting Colleges and Students reports that “completion is paramount” to preventing default. Indeed, their research shows those who complete programs default at a rate of nine percent, while three times that many students who don’t complete their programs default. Default rates escalate to 33 percent for students who leave their program mid-term.
No Longer Lost in “The System”
Other strategies listed in Protecting Colleges and Students may not be recognized as default reduction tactics, but do contribute to program completion and provide the student with a better support system. These include:
- Student success courses for underprepared students
- Mandatory orientations
- Academic alert systems that identify struggling students
- Analysis and removal of programs whose graduates struggle to find quality employment or to repay loans.
Retaining and supporting struggling students so students finish your program will reduce default rates, with the added benefit of increased graduation rates.
Emphasis on Exit Counseling and Follow-up
Protecting Colleges and Students study authors found that rates of default are much lower among students who complete exit counseling as opposed to those who don’t. Though exit counseling is required for borrowers, some students do not complete it and not all schools monitor or enforce the requirement.
Proactive schools could create email and/or phone call drip campaigns to continuously engage students who have graduated or withdrawn from school. Not only might this decrease default rates among all former students, it could also increase re-enrollment rates among those who have dropped out.
Early Awareness and the 6-month Grace Period
Schools must keep close tabs on students who have stopped attending school in order to notify the lender, explains Haley Chitty, Director of Communications for the National Association of Student Financial Aid Administrators in an article published on University Business. This early notification allows the student to receive the full six months of services provided during the grace period, and Chitty calls it “a critical time for borrowers to learn about repayment options.” Your school should have policies in place that monitor student attendance and report to lending institutions. You may also choose to contact students who are nearing the end of their six-month grace period to see if they qualify for deferment or forbearance.
Some schools have employed uncommon tactics to reach students who no longer seem to be opening loan-related mail, including scenting the envelopes or adding colored Easter bunnies or Valentine’s Day hearts to the envelopes.
While these last-ditch efforts helped colleges reach some delinquent student borrowers, your school and students would benefit from the earlier strategies listed above. The most important thing to remember when seeking to reduce default rates is to forge a relationship with students such that they complete their programs and find gainful employment, enabling them to easily repay their loans.
To request a sample of AwardLetter, a digital and dynamic software that helps schools increase enrollment, decrease default rates and forge better communication with students, click the image below or call 602.643.1300.