Strategies for Schools: Preparing for the New Cohort Default Rates

The first cohort default rates (CDR) calculated through the new federal formula aren’t due until 2012, but many financial aid offices already are planning their adjustment to the new rates. Under the new calculation some schools’ rates will increase while others’ may decrease. Either way they will need a strategy for communicating the change campus-wide and helping others understand it.

Beginning with federal fiscal year 2009, the calculation for school cohort default rates will change from a two-year period to a three-year period. A school’s cohort will still be the number of borrowers who enter repayment in a federal fiscal year. However, instead of counting the number of borrowers who default by the end of the following fiscal year, an additional year will be added to the time frame. 

Including more defaulters but not increasing the overall number of borrowers could reasonably increase a school's rate. It's also important to note that with an additional year in the calculation, more borrowers may be able to rehabilitate their loans in time to be subtracted from the numerator, potentially lowering the rate.

Consulting with financial aid professionals across the U.S., the College Assist staff has compiled this list of current best practices for preparing for the changing rate and communicating with other campus stakeholders.

• Work directly and independently with the admissions, recruitment, registrar, and advising offices to gather information.
• Create a team of the various offices to examine campus-specific CDR issues.
• Treat defaults as a university issue and not a financial aid issue.
• Rather than "default," use "retention" or another accurate term that facilitates an understanding of the issue as broader than just financial aid.
• Prepare a report of how the institution compares to national and segmental rates. Use a five-year graph to show how rates have increased/decreased within the institution, national, and segmental levels. Include reasons why the rate is changing and steps the institution needs to take.
• Use data gathered from NSLDS, guarantors, and the annual CDR reports.
• If you expect an increase in your school's CDR, create a report demonstrating that. Explain that the numbers in the cohort group will not change, but the number of defaulters will rise, which in turn raises the rate.
• Begin a proactive strategy now. Use tools such as Dollar Sensei to send default aversion letters to delinquent borrowers.
• Ask guarantors to prepare adhoc reports that target a specific cohort year of delinquent borrowers and then personally contact those borrowers.

The Department of Education plans to phase in the new calculations. For the first three years, both two- and three-year rates will be published. The first rate using the new formula won’t be published until 2012.

For more information on the new rate and timeline, contact Julia Alexander, College Assist’s compliance and training officer, at julia.alexander@college-assist.com.

Financial Literacy Focus
Managing Credit and Debit Cards

Staying in control and making sure your credit and debit cards work for you—instead of you working for them—is essential for good financial health.

Debits are in
Americans now use debit cards more than credit cards, which helps avoid building up a lot of high-interest debt. But debit cards also should be used with caution. Most automatically come with overdraft protection, which means if you don’t have enough in your checking account to cover a purchase, the bank will cover it for you—and then it will charge a fee, as much as $27 per transaction in some cases. According to Consumer Reports, that could add up to an interest rate of more than 3,500% annually.

Also, credit cards are much safer and offer better protection for online purchases. When doing any Internet shopping, it’s always better to use a credit card than a debit card.

Managing your credit card

Interest adds up
With credit cards, buying items such as a new laptop or MP3 player can cost hundreds of dollars more than their original price if you don’t pay off the bill right away, as interest charges add big bucks to a big balance and take years to pay off.

Minimum payments, maximum hassle
If you make just the minimum payment, you’ll virtually never pay off your account, and you’ll always end up paying a lot more out of pocket than the amount you actually charged to your card.

Don’t take cash advances
Getting cash from a credit card when things are tight may seem like a great deal at the time, but this option is simply another way for companies to charge extra fees and more interest. Cash advances usually carry a much higher interest rate than purchases.

Uncover the hidden charges
Here are some common extra account charges that build up quickly:

• Late fees: Sometimes equal to the minimum monthly payment.
• Annual fees: A yearly charge just for having the credit card, around $25 to $50.
• Over-limit fees: A penalty for being over your credit limit.
• Increased interest: When you make multiple late payments, the lender may increase your interest rate.

Stop new offers by opting out
Anyone can remove their name from credit card mailing lists and opt out of new credit card offers by calling 1.888.5optout or visiting  www.optoutprescreen.com.

The Good News

Ready for some good news? I’ve found that if I look closely enough, it’s out there. Of course, there are plenty of sobering reports as well, but my goal here is to focus on the positives in our work and among current events.

Even with all that’s happened to the economy and the corresponding effects on financial aid and higher education, a new study by the Pew Research Center tells us that college enrollment is at an all-time high in the U.S. According to the Pew Center, there’s been a big spike in community college enrollments, resulting in 39.6% of 18- to 24-year-olds enrolled in either a two- or four-year college in October 2008. That amounts to 11.5 million students—and a big dose of hopefulness.

Even as more students enroll, though, fewer families are taking advantage of programs that help them pay for college, like college savings plans. I read in USA Today that, to help families weather the current storm, banks and credit unions are stepping up with a variety of programs to help families pay for college. From bonuses for opening accounts to discounted loans and scholarship donations, local and regional banks are finding creative ways to help their customers.

Finally, here’s a bit of straight-on practical help from the federal stimulus funding: a new tax break for college costs. The American Opportunity Credit offers a tax credit of up to $2,500 to offset the cost of tuition, fees, and textbooks. This credit is in addition to the Hope and Lifetime Learning credits but is available only for 2009 and 2010—so take advantage while it’s there and pass this good news along to the borrowers you work with.

There you have it—a bit of good news to brighten your professional day. If you come across any positive industry reports to share with colleagues, we’d love to publish them in Outlook. Please send your news to me at teena.cooper@college-assist.com.

Ask the Experts

Repayment Help in Tough Job Times

College Assist's default aversion experts work daily with students and parents to help them stay on track with their loan payments. In this article we provide some common questions you might hear from borrowers. If you have a question you'd like to see published here, contact Vernie Yazzie at 303.696.3578 or via e-mail at vernie.yazzie@college-assist.com.

Borrower issue: I am unemployed and can’t make my student loan payments. 

Solution: You may be eligible for an unemployment deferment, which temporarily postpones repayment of your student loans. If your first student loans were disbursed before July 1, 1993, you are eligible for a maximum of 24 months of unemployment deferment time. If your loans were disbursed after July 1, 1993, your maximum deferment time is 36 months. The unemployment deferment will not last for more than six months, so you need to reapply every six months.

To qualify for an unemployment deferment, you must register with a public or private employment agency (a temporary agency does not qualify). You could also qualify if you receive unemployment benefits. A copy of the benefits documentation needs to be attached to the deferment.

Problem: My current income is making it difficult to make the required payments on my student loan.

Solution: You may be eligible for a new type of repayment program call the Income- Based Repayment (IBR) plan, which became available on July 1, 2009. 

To apply for IBR, you will need to complete an application and provide either a copy of your most recent tax return or consent for your lender to obtain income data you supplied to the Internal Revenue Service. If you qualify, a new monthly payment will be calculated based on your income, family size, student loan total balance, and state of residence (relative to poverty guidelines). 

Lowered payments will extend the life of your student loan. However, after 25 years of repayment, the government will discharge the remaining loan balance. You will need to reapply for the IBR plan every year and provide proof of income and family size. During the IBR plan, you are eligible for deferment and forbearance benefits on your loans, but that time will not count towards the 25-year discharge calculation (except for Economic Hardship Deferment). 

Special thanks to Vernie Yazzie and Elizabeth Schultz, College Assist Default Aversion, for providing this month’s solutions.

College Assist Staff Member Honored with Hall of Fame Award

The Colorado Association of Financial Aid Administrators (CAFAA) honored College Assist’s Debbie Erickson with its prestigious Hall of Fame Award in October. The award recognizes CAFAA members who have made significant contributions to the financial aid profession and to CAFAA over a long period of time. Erickson, a regional director of College Assist, was nominated and selected by the Board of Directors and its Executive Committee.

"I was really surprised and humbled, to say the least," Erickson said. "I have been on many committees throughout my 12 years in CAFAA and just love working with all of these folks."

Her extensive CAFAA contributions include serving on the Conference, Professional Development, and Financial Aid Awareness committees. She served as CAFAA's Service Sector Representative to the Board of Directors, received the President’s Service Award in 1999, and received the Service Organization Representative of the Year in both 1997 and 2000.

"We’re delighted that Debbie has been recognized with such a high honor for her work in the field," said College Assist’s Manager of Marketing & Sales Teena Cooper. "College Assist encourages its staff to share their expertise in every way possible, and we’re proud of the dedication Debbie has shown to financial aid professionals."

Erickson has worked in student financial aid for 26 years. She says she admires financial aid administrators for their commitment to helping students and enjoys working with them through CAFAA.

“I continue to encourage more new financial aid folks to volunteer. Many of my mentors have received this award in the past, and I would be so honored to see some of my new committee friends receive it in years to come,” said Erickson.