As education costs continue to rise, more and more students are defaulting on their college loans. Student loans outstanding are in excess of $1 trillion and cohort default rates have been steadily increasing over the past couple of years. In addition, the Consumer Financial Protection Bureau is actively looking at complaints related to student lending and student loan account servicing, which could potentially open Pandora’s box on shortcomings in the space.
Given these challenges and the immense pressure the industry is under to reverse cohort default rate trends, student lenders and collectors should take a close look at their approach and evaluate their strategy. A few key questions come to mind:
1. Why are students defaulting on their loans and what types of programs can schools implement to prevent this from happening?
Unemployment or underemployment, over-extended in debt, and avoidance are just a few of the most common reasons why students are defaulting on their loans.
Another reason: lack of clear communication and understanding at the very beginning of the process. Many students experience confusion from activity-based messaging, letters, and calls from multiple servicers/vendors. Improved financial literacy education on repayment and deferment options goes a long way in preventing students from defaulting.
Working with schools and providing them comprehensive business intelligence around how their portfolio is performing and the contact strategies that need to be employed to control cohort default rates is one of the best ways to manage collections on student loans.
3. How can the student experience be improved to better control cohort default rates?
Delivering an exceptional student experience throughout the entire process should be the number one priority. This means treating the student fairly, educating them on the various options available to them, and giving them flexible options to engage in discussions about their debt, be it through the Internet, Email, Phone, Letters, etc.
The heightened sensitivity around student loans is placing a greater emphasis on delivering a positive experience. Our approach and focus should be on more than simply delivering results at any cost. Instead, agencies should determine how to turn the collections experience into a positive experience for the student, which in turn, will bring down default rates for schools.
Tim Smith is Senior Vice President of Collections at Firstsource Solutions.