Borrowing in America

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Student Borrowing in America: Metrics,
Demographics, Default Aversion Strategies
By Frank Kesterman
Frank Kesterman is a
consultant in the Washington
DC area. He formerly served
for the Department of
Education in the office of
Federal Student Aid.

The use of Cohort Default Rate (CDR) as the primary measure of student loan defaults among undergraduates was investigated. The study used data extracted from the National Student Loan Data System (NSLDS), quantitative analysis of Likert-scale survey responses from 153 student financial aid professionals on proposed changes to present metrics and methods, and anonymous, qualitative interviews with 12 notable scholars and experts about default aversion strategies. A sample of defaults over eight years revealed a default rate of 17.91%, or almost double the published two-year CDR of 9.6% for the 1996 cohort. Further, the actual average default rate for the entire student loan portfolio was found to be 13.65%, or 2.44 times higher than a point-intime CDR of 5.6% as of September 30, 2002, suggesting limitations of the CDR as the sole loan portfolio measurement tool. Additionally, there is dissatisfaction with the present 25% default rate ceiling required for schools to maintain institutional eligibility to participate in the Title IV federal student aid programs. Entire school groups exceeded the 25% default ceiling when

viewed over eight years. The study also found strong support for greater utilization of loan guaranty agencies in default aversion instead of debt collection.
The study concludes that economic and demographic
changes taking place in higher education over the period 20012015 necessitate increased funding for outreach programs to educate low-income and minority at-risk populations on the availability of federal student aid, student loan repayment options, and the consequences of default. Other recommendations of the scholars and experts interviewed for this study include re-engineering default management and school performance measures, forming a national task force focused on finding affordable higher education approaches for the at-risk groups, and initiating a study of expanded debt forgiveness for critical occupations such as teaching, health care, and civil protection.

A

s of September 30, 2003, there were 5,582,494 Americans in default (NSLDS, 2003) and many more are carrying very large student loan debt burdens that might contribute to the risk level of the federal student loan portfolio. The growing burden of student borrowing calls into question the

personal benefits model that assumes that Americans will continue to borrow to finance their postsecondary education as an investment in their future. David Ward, president of the American Council on Education, expressed concern about the financial health of academe when commenting on tuition increases. 34

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There are “very serious long-term issues in financing higher education that ultimately threaten the social compact that has served students and families so well for more than 50 years” (Hoover, 2004, p.1).

Debt burdens need to be better understood in human
and statistical terms in order to devise default aversion options that work (Kesterman, 2003). A recent report titled “Burden of Borrowing,” published by the Higher Education Project of the State Public Interest Group in 2002 and based on the U.S. Department of Education’s 2000 National Post Secondary Student Aid Study, found that an estimated 39% of student borrowers

are graduating with “unmanageable debt,” which is defined as debt in excess of 8% of borrowers’ gross monthly income. In addition, 55% of African-American student borrowers and 58%
of Hispanic student borrowers graduated with unmanageable
debt burdens (King & Bannon, 2002).
Attitudes toward borrowing appear to be changing. In
the 2002 National Student Loan Survey sponsored by Nellie Mae, only 59% of...
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