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Financial Aid

A Blueprint to Lower Default Rates

Default-aversion and degree-completion strategies
University Business, Apr 2010

With rising student loan debt, a tough job market for recent graduates, and a tougher default standard higher education institutions will have to meet in 2014, strengthening default prevention efforts is an imperative. Yet it's not always clear what factors determine default rates and how much influence higher ed institutions have in keeping defaults low.

Indiana University School of Education researchers found no linkage between the type or quality of institutions and the rate at which borrowers default on student loans. Their 2008 study generally contends that individual student traits, such as income, have a greater impact on the chances of default than institutional characteristics, such as the amount students can borrow. The study explains why IHEs serving large numbers of first-generation and low-income students (populations more likely to drop out and who generally have fewer family resources to rely on) are more likely to have higher default rates.

As a February report from Education Sector found, IHEs can effectively lower default rates. "Lowering Student Loan Default Rates: What One Consortium of Historically Black Institutions Did to Succeed" highlights the experience of 12 HBCUs that lowered default rates in the early 1990s, when sanctions were established to crack down on unscrupulous schools that left students with a lot of debt and a questionable degree. It argues that institutional defaults are not determined solely by student demographics. There is "powerful evidence that institutional practice can make a difference in determining a school's default rate, even for schools that enroll high percentages of low-income and first-generation students," write authors Erin Dillon and Robin Smiles in the report.

Default is not just the financial aid office's responsibility.

The institutions studied were at risk of losing Title IV eligibility 10 years ago due to new regulations that penalized schools for high default rates. Each managed to reduce its rate in the first year, and six schools that formed a consortium managed to lower their rates faster and more dramatically than other schools. Their efforts provide a blueprint for lowering default rates. IHEs combining default aversion strategies with strategies for degree completion will be in the best position to reduce default now and in the future, as well as improve the overall success of the institutions and their students, the report states. The strategies employed included:

Successful default management requires the interest and commitment of those not traditionally concerned with financial aid issues, notes the report. But it can be a challenge to convince campus administration and faculty that default is not just the financial aid office's responsibility. Helping others understand the issue and the consequences is a way to make default a campuswide responsibility.

Many HBCUs appointed a full-time person to handle default prevention. The person: served as a liaison between the financial aid office and other departments; worked with outside entities to track borrows at risk of defaulting; identified students most likely to default; raised student, faculty, and staff awareness of default, and developed financial literacy programs.

These teams included administrators and staff from across campus. This helped ensure that default prevention efforts were present wherever a student interacted with his or her institution. The approach also helped the schools assist students who dropped out. Because students who don't complete their degrees are more likely to default, it is important to target default prevention efforts to these students.

Involving a variety of campus departments allowed for early intervention. Academic affairs staff, for instance, would alert the financial aid office of a significant drop in grades, which could signal impending dropout. Faculty members were prepared to notify both academic

Keeping students from borrowing more than they need is an ongoing challenge as college costs and loan limits increase.

affairs and the financial aid office when a student stopped showing up to class. The registrar's office would signal a warning when a student failed to enroll or withdrew from classes. This approach helped students after they left campus as well. For example, the registrars' office placed a hold on transcripts until the financial aid office was contacted, and alumni affairs helped locate hard-to-find borrowers.

The colleges also partnered with outside entities experienced in skip tracing to find missing people, collections, and personalized customer service. The outside entities also helped upgrade the campus technology used to track borrowers, allowing them to identify borrowers more likely to default and provide additional assistance.

Accurately identifying borrowers likely to default empowered these institutions to modify aid packages, helping students before they borrowed. The "out of control" financial aid packaging described at some schools would provide students with more than their direct costs.

As college costs and loan limits continue to increase, it's challenging to keep students from borrowing more than they need. Financial aid offices don't always know when students borrow private loans, either. The HBCUs instituted policies such as only giving students the bare minimum in loans (those requesting additional loans would meet with the financial aid office for more counseling). Another strategy: Outlining for parents the consequences of students borrowing too much.

Students at high risk for loan default share many of the same characteristics of students more likely to drop out before completing a degree. Institutions that serve a large portion of these students can lower default rates by increasing retention rates. For schools with open enrollment policies, this means being realistic about admitted students' deficiencies and providing support such as tutoring, which offers another opportunity to counsel students and discourage them from dropping out?even if just to complete the semester to avoid wasting loan money on incomplete courses. Some HBCUs hired a retention coordinator to lead efforts.

Quickly identifying students at risk for dropping out or borrowers at risk for default empowers IHEs to intervene before it's too late. Early alert systems can also enable a school to provide repayment notifications to students who drop out during the six-month grace period. Nine in 10 borrowers who default don't receive their full grace period because of late or inaccurate notification by the school, according to the Department of Education.

Institutions keeping close tabs on students -- through class attendance records, grade monitoring, and communication across campus -- likely know as soon as a student has stopped attending and can notify the lender promptly, allowing the student to receive his or her full six months of services, the report states. That six-month grace period is a critical time for borrowers to learn about repayment options.

The HBCUs used several creative strategies for continuing communication with borrowers, including sending birthday cards, contacting them during holidays, and aligning default prevention visits with events such as social gatherings and sports games. The schools used personal contact, a natural extension of the small, intimate nature of their campuses. But, the report notes, "personal contact does not need to be limited to small colleges." Frequent personal contact increases engagement, which has been shown to increase academic performance and increase retention, which can help lower default rates.

Some colleges used unusual tactics to reach out to delinquent borrowers, such as perfumed envelopes, envelopes marked with "Check Inside," and colored Easter bunnies. The report encourages IHEs to customize practices such as these for their unique student populations.

Educating students about the pros and cons of borrowing as part of a broader effort to provide students with a basic understanding of finances is crucial, according to the report. The HBCUs used financial literacy courses and mandated more frequent loan counseling than required by law to build student awareness of loan debt and repayment obligations. The courses also offered an additional opportunity to reinforce that the financial aid office could help them if they got into trouble. The report emphasizes the effectiveness of one-on-one communication and repeating information to students to increase the probability they'll retain it.

IHEs can't fully prevent borrower default, but they can have a strong influence. "We found that student demographics are a significant predictor of cohort default rates. But we did not find that they are the sole predictor of an institution's CDR or even the primary predictor," the report states. Institutional characteristics, or in some cases unmeasured factors, are key to predicting an institution's default rate.

The success of the 12 HBCUs profiled shows that IHEs can indeed influence default rates, and that they are not at the mercy of student demographics.

Haley Chitty is director of communications for the National Association of Student Financial Aid Administrators,