New Methods To Prevent Student Loan Default Proving Successful

Source: TG

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Two-thirds of all college students in America now rely on loans to finance their education, and with the escalating cost of college the amount of money being borrowed by students continues to rise rapidly.

In 1993, students took out $20.7 billion in federally subsidized loans to pay for college. By 2003, borrowing for college had jumped to $49.1 billion, a 137 percent increase. And as more money is being borrowed, the risk of borrowers defaulting on student loans also increases.

But a few years ago Congress authorized the U.S. Department of Education to enter into Voluntary Flexible Agreements (VFAs) with a select group of student loan guaranty agencies, modifying existing agreements in order to try innovative approaches intended to enhance program integrity, increase cost efficiencies, and improve availability and delivery of student financial aid. The VFAs have a strong emphasis on strategies to prevent delinquency and default of federal student loans. Guaranty agencies are federally funded, non-profit or state agencies that administer the Federal Family Education Loan Program (FFELP) for the Department of Education. TG is a public non-profit guaranty agency created by the Texas Legislature.

In addition to guaranteeing federal student loans, guaranty agencies also help borrowers understand their responsibilities in repayment of student loans. However, guarantors generally derive the bulk of their revenue from the collection of defaulted loans. The VFA program, allows the guaranty agencies to develop alternative funding models and to experiment with different performance-based methods of default prevention.

Paul Combe, president of the National Association of Student Loan Administrators (NASLA), said that the VFA program allows guarantors the “flexibility” to find new and innovative ways to prevent loan default and get rewarded for successful efforts.

“The objective of the VFA program is to find best practices, collect data and share results that capture what best benefits students, schools, the federal government and the American taxpayer,” Combe said.

By most estimates, the limited program has been successful. Cohort student loan default rates have been reduced by 47 percent, and the four guarantors with VFAs are deriving more of their revenue through delinquency and default prevention than from collections of defaulted loans. A major reason for this trend is that guarantors are contacting borrowers during the six-month grace period between graduation and the start of loan repayment, as opposed to waiting until a borrower is delinquent on monthly payments.

TG, for example, now derives only 35 percent of its revenue from collections, from a high of 60 percent before entering into its VFA ith the Department of Education, shifting revenue to successful efforts in delinquency and default prevention which has increased from less than 10 percent to more than 30 percent of TG’s total revenue. In 2006, TG worked with 325,000 borrowers to prevent more than $3 billion in delinquent loans from defaulting, and has contacted a total of 1.6 million borrows to prevent $15 billion in defaults since inception of its VFA in 2001.

TG and other guarantors are developing programs to focus on financial literacy to help borrowers understand their obligations, and to prod them to study realistic repayment options before they graduate. The key is to provide borrowers with critical information while still enrolled in school, and to develop hands-on training programs for college financial aid professionals to help better serve their students.

Financial literacy programs, coupled with pre-delinquency counseling, also augment efforts to have colleges and universities implement default prevention and management plans to provide students with comprehensive information to adequately prepare them for their post-collegiate future.

Combe said participants in the VFA program will continue to develop programs to find the best effective practices to lower delinquency and default on student loans.

“We are confident that we can shape the future of student lending and enhance the process,” he said.

For tips on how to establish high expectations for students as early as middle school and for assistance in planning for higher education academically and financially, visit TG provides this Web site as a public service to help all families and students achieve their educational goals and career dreams.

About TG

TG is a public, nonprofit corporation that administers the Federal Family Education Loan Program (FFELP). High resolution files suitable for publication are available as a free download from TG’s web site at For more information, please e-mail or call [email protected] or 512-219-4990.

(C) Copyright 2007 TG & Collegiate Presswire. All Rights Reserved.

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