Develop a Successful Default Prevention Plan for Your School
Why Is Default a Problem, and Who’s at Risk?
Characteristics of Defaulters*
- Older (median age of 38 years old)
- Pell recipient/low-income
- Undergraduate loans only
- Median loan balance: $5,800
- Poor financial literacy
- Did not complete degree
*From December 2013 Federal Student Aid Conference Session, "Increasing Your Student Borrowers’ Repayment Success"
Rising default rates are a concern for many schools. Nelnet is working hard to keep our borrowers on track with their loan repayment and to help those who are falling behind. Below are steps you can take to develop an effective, comprehensive plan for your school, along with links to resources and tools that can help.
▼ Read a School's Success Story
- Large multi-campus proprietary school
- Previously high default rates
- Efforts below helped bring rates down significantly
The school got cross-institutional buy-in.
The story might sound familiar: Before, nobody listened, nobody cared, and it was hard to break down silos. Success was achieved when the financial aid office was able to get top-level executive buy-in.
To help get buy-in, they told real stories of former student borrowers who went into default. Here were some of the reasons given by defaulters:
- Split servicing
- Honest mistakes
- Wage garnishment
- Unable to fix; got overwhelmed
- Payments ballooned
The school also looked at their Return on Investment and found that it’s much less expensive to retain students—the high costs come from students who withdraw. Other high costs stem from recruitment.
The school started a Repayment Success Board:
- Meets once a quarter
- Focuses on mitigating default rate
- Made up of Provost, Chief Operating Officer, and other school officials
- Created campus committees
- A new person joins at least once a month
- Focuses on importance of repayment
- Sent correspondence collateral to their campuses, which was expensive but worth it
- Enrollment team focuses on risk models and predictive tendencies
- Uses a repayment model to predict who may default so they can provide extra service and support
The school began using predictive modeling.
Predictive modeling involves gathering data and internal expertise to predict who will default in order to customize default services. The school was able to have statisticians assigned to project. They developed profiles of potential defaulters that included characteristics, behaviors, attendance patterns, academic preparation, programs of study most likely to experience withdrawals, and other factors of default.
The predictive model they developed allowed the school to:
- Develop risk scores for borrowers
- Segment borrowers by groups
- Create customized monitoring and intervention plans for each group
The school created an internal team (made up of various specialties and campuses) to develop a communication and intervention plan:
- In-school communication that offers support and counsel
- Contracting with a vendor to provide financial literacy
- Contracting with collection vendors to contact their borrowers
- Early warning system that identifies students in danger of withdrawing, allowing intervention
- High commitment to long-term prevention program
- Rapid outreach to students who leave prior to program completion
- Contact made with borrowers who are nearing graduation to provide information about repayment
- Additional information provided during grace
- School makes sure that vendors follow up right away when borrowers become delinquent—the best time for intervention is early
It’s important to consistently review vendor performance and work closely with FSA and other service providers.
This school chose to employ more than one vendor to spark competition and increase performance levels.
The school regularly monitors vendor performance levels quarterly:
- An intensive evaluation form is used
- Success is measured by repayment vs. forbearance/deferment rates (schools pay vendors less for deferment/forbearance than for successful repayment)
- Repayment trends are also an important measure
- School looks at “cure” rates, which involves getting delinquent borrowers back on track
- School meets with FSA, servicers, and other providers as a group to review borrower needs, school issues, and recommendations
Additional Case Studies
Default Prevention Plan Steps
Define the default-related issues at your school, and share that information with key stakeholders.
To obtain executive support, it’s vital to share data, tell stories of students who have defaulted, and present the cost implications of losing students before they’ve completed their programs.
Evaluate your default prevention data and readiness by asking these questions:
- What were our 2012 three year Official Cohort Default Rates? Are we likely to hit the 30% sanction threshold?
- What is the source of our default risk?
- Why is default an issue at our institution?
- Do we have the right team in place to develop and execute default prevention strategies? If not, who do we need to include on our team?
School Tips & Best Practices
- Retention and student success is a school issue, not a financial aid issue. To be successful, cross-institutional buy-in is critical
- Intervention efforts need high-level support to be successful. The effort can break down without it
- It is important to have a communication plan that includes brief, periodic updates for high-level management
Organize a cross-divisional team.
Possible members of this team may include:
- Financial aid office
- Representatives from key student service offices
- Student affairs
- Academic faculty and academic advisors
- Enrollment management/admissions officers
- Student accounts staff
- Placement office representatives
Consider what each can do to support special programs for at-risk students and provide early warning to students who are showing signs of withdrawing. Set up recurring monthly or quarterly meetings to proactively prevent default, create action plans, and evaluate your success rate.
Here are the initial steps necessary to formulate your plan:
- Determine the source of your default risk
- Decide what steps your school will take to reduce default risk
- Recruit from all areas of the institution (including management and students) to help you create risk-reduction activities
- Allocate school resources toward default reduction activities
- Assess the effectiveness of default reduction activities over time
- Are they working? Why or why not?
School Tips & Best Practices
- Develop a cross-divisional team of those whose scope of responsibility ties into retention
- Provide a clear vision of what each member contributes to the committee
- Take time to educate the committee about your institution’s Cohort Default Rate issues and contributing factors
- The team meetings can include senior management on occasion. Examples include:
- Admission/Enrollment Management
- Dean of Students/Residence Life
- Provost/Academic Dean
- Director of Student Accounts
- Registrar/Academic Advisement Chairs
- …and others
Gather data to identify at-risk borrowers at your school.
When you're analyzing the students who are at risk of becoming defaulters at your school, it might not be easy to diagnose the main factors. Every school's "who" is unique depending on its size, demographics, and programs.
The “why” of loan default is just as important as the “who.” Getting an accurate assessment of why students are defaulting requires input from multiple school professionals.
Here are some common characteristics of those who are at risk of withdrawing before program completion and defaulting on their loans:
- Lack of finances
- Relationship issues
- Physical and mental challenges
- Transportation/housing issues
- Poor study habits
- Language barriers
- No campus connection
Along with reporting and default-prevention tools like Nelnet Loan Servicing’s Nsight Plus, there are several other ways to gauge the risk factors for default at your school. Utilize the following resources and tools to find out who is defaulting and why:
- Admissions reports
- Entrance and exit counseling
- Probation/satisfactory academic progress reports
- Registration metrics
School Tips & Best Practices
Define the problem before developing a comprehensive action plan. The data below can provide the big picture to get you started. It’s also important to look at factors at your institution. Here are some common factors to consider:
- Withdrawal rates/default—what is the relationship at your school?
- Of these defaulters, how many withdrew officially/unofficially?
- What are the enrollment/academic patterns of those who did not complete?
- When did they apply, and what were their attendance patterns?
- Is there a retention difference among academic programs or certificate and degree programs?
- What are the characteristics of those who defaulted (first-generation college students, 0 EFC, remedial needs, etc.)?
- Other factors as determined by your college
Develop an in-school plan for at-risk students.
Use what data tells you.
- Reach out to at-risk students immediately with targeted campaigns
- Help students remain in school if at all possible
- If they’ve already left, help them return
- If they will not return, help them understand their repayment obligations
- Some borrowers think they don’t owe anything because they left
School Tips & Best Practices
- Consider different approaches for those who are most at risk vs. developing a one-size-fits-all program
- Consider special learning communities for at-risk students and/or developing an early warning system for those who are beginning to have attendance issues or who are showing other signs of disconnecting from school
- Consider supplementing entrance and exit interviews with group or in-person support
- Use what you learn from these processes to help other students stay in school
Develop an in-school plan for all students.
Possible intervention opportunities
- Enhanced entrance and exit counseling
- Financial literacy education
- Collecting all useful contact information (annually at minimum)
- Offer early-stage repayment assistance
- Offer late-stage repayment assistance
Educate your borrowers about financial literacy, either with resources like Nelnet’s financial literacy page or by developing your own. Here are some questions your borrowers might not know to ask. Offer answers to these important questions:
- Who is their servicer?
- What does their servicer do?
- When should they contact their servicer?
- Where can they find out more about what their servicer offers?
- How do they determine if they have multiple servicers (FFELP/ED-owned)?
School Tips & Best Practices
- Encourage students to sign up for electronic payments/communications with their servicer
- Let your students know that they should communicate with their servicer(s) if they are having difficulty making their payments
- Provide information about servicers and their roles early on in the borrower’s educational cycle
- Collect references at least once a year, and send the most recent information to the servicer when a student separates from your institution
- Prior to program completion, collect references again—then, let borrowers know they will be hearing from servicers as you educate them about the servicer's new role
- Let borrowers know they have repayment schedule options
- Provide basic information about deferments, forbearances, consolidation (if applicable), etc.
- Discourage students from over-borrowing
Develop an out-of-school follow-up plan with an emphasis on reaching out to at-risk students and delinquent borrowers.
There are many ways to intervene, and some of them will work better with certain students. It will depend heavily on your school and its demographics.
A few ways to intervene:
- Use social media to promote positive loan repayment habits
- Ask borrowers to contact you if they have questions
- Reiterate the importance of communicating with loan servicer(s)
- Validate all borrower contact information
- Offer re-enrollment or transfer assistance
- Offer employment counseling and search assistance
- Offer all students job-placement assistance
Contact Them the Right Way and at the Right Time
- Contact borrowers in early-stage delinquency (30 to 90 days) directly
- Contact those in late-stage delinquency (210+ days) by phone, if possible
- Review servicer information with students and urge them to contact their servicer
Engage your borrowers! Borrower engagement is a key factor in successful default prevention.
Educating students is half the battle. Borrowers often don’t know about different repayment options, deferment/forbearance, income-related repayment plans, and several other available options. For the most part, we’ve found that borrowers want to do the right thing—they just need to know how.
Communicate with your borrowers through a variety of methods including phone calls, emails, and letters. Here are some resources to assist you in your communications with borrowers:
School Tips & Best Practices
- Use a combination of emails, calls, and letters to contact delinquent borrowers
- Consider using Nelnet’s Nsight mail-merge letters to deliver targeted messages to borrowers who are behind on their payments
- Use different messages and approaches based on levels of delinquency (click here for examples of communications)
- Work on invalid addresses (either use servicer reports or develop your own)
- Respond to servicer skip tracing reports in a timely manner
- Work with servicer reports to monitor borrowers in addition to using NSLDS reports
- NSLDS has better, more comprehensive, and more recent information
- Use front office staff (and others in your office) to make delinquent borrower calls and to help with borrower correspondence during non-peak office time
- Challenge Draft CDRs—it’s an extensive effort, but it’s worth it
- Try “warm” transfers to servicers as a strategy
- If you get borrowers on the line, it’s important to get them to take action right away
- Let borrowers know they can contact you and their servicers if they have questions
Carry out the plan, monitor results, and adjust where needed.
Actions to consider
- Work with your federal loan servicers as you develop and execute your plan—they have resources, people, training, information, reports, and other services for schools
- Servicers are also in regular contact with your borrowers
- Continue to monitor performance statistics as noted in your plan—actions that impacted withdrawal rates, information obtained from students who withdrew, financial literacy program participation, success of various outreach efforts for delinquent borrowers, etc.
- Review your draft Cohort Default Rates each year and update any incorrect information
Now you can begin creating your own plan. Use our Default Management Plan template to get started!