Addressing Student Loan Default Rates at Your Institution
Alex Reinstadtler, Vice President, Business Development Loan Science
Outstanding educational debt in this country exceeds $1.5 trillion. CNBC reports that one million people default on their student loans every year. The default rate at any college or university is an important metric. High default rates can mean limits on participation in Title IV federal financial aid programs and even losing access to federal financial aid funds. What can colleges and universities do if they are faced with rising default rates?
It is critical to preface any discussion about student loan default prevention with the universal truth that the federal student loan program offers repayment options for EVERYONE. Borrowers can qualify for an income based repayment plan that has a $0 payment and offers loan forgiveness after 20 years for undergrads (25 for grads). Given the payment options, why do so many borrowers default on their student loans? The answer is simple: they don’t understand their options. Some borrowers are just plain angry and choose not to take action out of spite, but that’s a small group. The next logical question is why don’t they know?
- The information is available in entrance counseling.
- The information is also outlined in exit counseling material.
- The loan servicers mail and email information about these programs.
- Loan servicers also call borrowers.
- Schools will also often mail and email information.
The challenge is in the borrower response to information provided. Entrance counseling can occur four or more years prior to repayment; exit loan counseling can be muddled in the fog of graduation activities or the stress of separation due to dropping out, suspension or expulsion. People, especially young people, often do not read or respond to email, robocalls or physical mail. What can be done?
Create a default prevention unit on your campus.
- Establish a goal for your default rate.
- Create a written default prevention plan.
- Make your default prevention plan a campuswide effort. Your retention professionals, for example should be involved in any default prevention discussions.
- Update all your student loan borrower information materials to maximize effectiveness. Make sure you have a financial literacy program in place for your students.
- Consider purchasing software to track your borrowers internally. Such software is also available to electronically enable you to communicate with your borrowers utilizing mail, email and telephone outreach.
Many schools now collaborate with a partner to counsel borrowers and stem loan defaults.
- An experienced partner will be able to help you create and implement the priorities outlined above.
- The best tactic to help borrowers who run into trouble is telephone counseling. It is critical to find a partner with the ability to make LOTS of telephone calls. Call centers designed to handle only in-coming calls are not sufficient. It’s a difficult task as borrowers are naturally skeptical to speak with people regarding debt, but persistence does pay off. You need a partner with the ability make tens of thousands of outgoing calls per month. This is where the help of a partner is beneficial.
- Search for a company able to communicate with your borrowers by email. Keep in mind, however, that the general expectation is that only 15% of the borrowers will open such emails. Further, fewer than 3% will take action as a result of opening the message.
Default prevention is important. The College Scorecard is a resource that more families are using to assess the quality of outcomes for prospective colleges and universities. Student loan repayment rates are a key statistic in the scorecard. Understanding these dynamics is important because if your default and repayment rates lag those of your competitors it creates one more reason for a student to select another school to attend.