We wrote recently about why students should be concerned with cohort default rates (CDR) and why college administrators should be even more concerned about this all-important student loan number that’s on the rise even for the most reputable schools. The cohort default rate is huge because if it’s above an acceptable threshold and remains high, your college can lose eligibility for government funding. And, if your university is above the 30% rate, you’ll have to take demonstrable steps to improve.
In this post, we will talk about some ways you and your school can reduce your cohort default rate. But first, did you know that 20% of delinquent student loans become current once the borrower registers and uses Tuition.io? At the end of this post we will show you how Tuiton.io’s tools for school administrators can help your fight.
What Drives Student Loan Default Rates?
A weak economy and faltering job market make it more difficult for graduates to find jobs. And if they can find a job, it may not be at a salary that allows them to service their debts. The increase in individual borrowing is also a factor. With student loans averaging nearly $30,000 per grad, the debt load alone can make it difficult to keep up. Lack of understanding of more affordable repayment plans is an issue, as well, because many grads just don’t know that they can get cheaper payments.
What Are the Consequences of High Cohort Default Rates for Colleges?
Default is not good for anyone. For students, it ruins their credit, can lead to wage garnishment and results in increasingly higher debt. But for colleges, it’s not good news either if their former students can’t pay their student loans. If your school has a CDR of 30% or higher, you have to form a Default Prevention Task Force and submit a plan to the Department of Education on how you’re going to make it better.
If you don’t make it better, your college, university or institution could lose eligibility to participate in the Federal student loan program and Pell Grant program. If you have three years in a row of 25% or higher two year cohort default rates or one year greater than 40%, you can lose eligibility. For three year cohort default rates, three years at 30% or higher or one year higher than 40% can trigger the loss.
How a Default Prevention Task Force Can Help
The task force your educational institution establishes must work to identify the factors that are leading your former students to default on their student loans. As part of your improvement plan, you’ll have to establish quantifiable objectives to improve the default rate and defined steps to make these happen. The groundwork for default starts long before graduation and so your plan must look to the root of the problem to begin addressing at the early stages.
Some Ideas to Improve Default Rates
So what can help improve default rates? With absolutely no irony we say that education is key. Since the debt came as a result of the defaulter seeking an education, this seems an oxymoron. But understanding personal finance and the ramification of debt is not something that’s taught in college. Corporate finance, sure. Personal money skills, not so much. And while high school students do usually have a personal finance class at some point, student loans are likely not part of the curriculum.
Students should understand from the get-go what student loans will mean to their future. As a college borrower myself, I know that I was rapidly shuttled through the loan application process. A concern may be that if you present the nitty gritty on student loans before students borrow, they may opt for a cheaper school. And that may happen with some, but that’s preferable to losing institutional access to Pell Grant and student loan programs.
Students should be educated on the long-term impact of student loans and how much this will cost them on a monthly basis and overall. Not only should this be explained prior to the first loan being taken, it should be revisited annually to discuss the amount of debt accrued and how this has escalated monthly payments. This should be done prior to each disbursement. As well, a pre-graduation course or seminar should be offered (and made mandatory) that explains in detail the grace period, affordable repayment options like IBR and PAYE, how deferment and forbearance work and how to avoid default at all costs.
20% of Delinquent Loans Become Current within 30 days of Signing up for Tuition.io
We have done extensive analysis on the changes in borrower behavior that take place when a borrower signs up to Tuition.io, and what we’ve found is pretty impressive. As stated above, 20% of previously-delinquent loans are made current within 30 days of the borrower signing up for Tuition.io.
What this means is that schools can reduce their default rates simply by encouraging them to sign up for the free student loan tool. With this, the student can see all their loans, both federal and private, in one easy dashboard, see their monthly payment total, check out the effect of different repayment plans and get a ton of information, how-to guides in our Student Loan Help Center and tips to deal with their debt on our daily blog.
In addition to the free tool for students, Tuition.io provides an enterprise-class tool for school administrators that provides powerful real time analytics, financial literacy, and cohort default management tools. Our analytic tools work directly with the student servicer accounts to detect delinquencies in real time and provide options to the borrower, before they default. Tuition.io is dedicated to helping students, and schools, solve the problems around loan repayments.