The 3-year cohort default rate comes with a silver lining — loan rehabilitation

by Chansone Durden, TG Account Executive Team Manager

This past February, the Department of Education (ED) released the first draft 3-year cohort default rates (CDRs). Meanwhile, official 3-year rates won't be available until September, and the first set of CDRs on which sanctions could be based won't be released until September 2014. Many schools are already worried about the increase in their CDRs, however, and for good reason. Trial 3-year data provided by ED indicates that all school sectors will experience a surge in rates, with some schools seeing a rate hike of up to 90 percent. That kind of increase could expose some schools to serious consequences, including a loss of eligibility for federal student aid.

The 3-year CDR doesn't bring all bad news, however. With the longer monitoring period, loan rehabilitation can have a positive impact on a school’s CDR. Remember that a borrower can rehabilitate, or bring a loan out of default, by making nine on-time monthly payments during a period of 10 consecutive months. The loan is then sold to a lender, and the default is removed from the borrower's credit history.

How does this help a school's CDR? If the borrower rehabilitates the loan before the end of the cohort default period, the borrower is not in default anymore and so not included in the school's CDR calculation. Even better, the borrower once again becomes eligible for federal aid after the sixth consecutive payment, meaning he or she could potentially return to school to complete a degree or certificate. (Keep in mind, however, that borrowers can renew eligibility only once.)

Helping borrowers and cutting default
Until the 3-year CDR was introduced, loan rehabilitation wasn't something that could feasibly affect a school's rate. Now, borrowers who default in the first year of repayment have time to meet rehabilitation requirements within the three-year CDR window,

How can schools use loan rehabilitation to help their borrowers and mitigate default? Here are some tips for integrating loan rehabilitation into your school's default prevention plan.

• Identify borrowers with defaulted loans — With each CDR notification, ED provides schools with the Loan Record Detail Report, or LRDR, an itemized listing of borrowers, including borrowers with defaulted loans. Download and use this information electronically.
• Develop a communication campaign — Use LRDR information to create a communication campaign for defaulted borrowers that outlines the process and the benefits of loan rehabilitation. Consider contacting borrowers via mail, email, and phone, with messages that reinforce each other. Some things to cover in your communications:
• Borrowers will need to establish a loan rehabilitation agreement with the guarantor or collection agency that holds the defaulted loans.
• Borrowers will need to stay in touch with their guarantor or collector throughout repayment, especially if they change their mailing address.
• Borrowers can benefit greatly from loan rehabilitation and from establishing healthy repayment habits. The removal of default from a borrower’s credit history can be invaluable — an improved credit record means easier access to credit later on if borrowers wish to borrow for a car or house mortgage.

You can also use LRDR information to help your default prevention efforts in other ways. For example, analyze the data on your defaulted borrowers, looking for common factors which may have predisposed borrowers to default. Do certain majors contribute a disproportionate number of borrowers in default? Did many borrowers withdraw without giving notice? How was their academic performance? You may be able to use this information to help current students who share such characteristics by offering academic and career support to students at greater risk of defaulting in the future.

Chansone Durden is an account executive team manager with TG serving schools in SASFAA. You can reach Chansone at (800) 252-9743, ext. 6710, or by email at chansone.durden@tgslc.org. Additional information about TG can be found online at www.TG.org.