Measuring Guarantor Default-Prevention Performance
Student-loan guarantors have a fundamental responsibility for preventing education-loan defaults. But how does a financial-aid office or education lender identify a guarantor that provides excellent default-prevention services? Here are some considerations:
Cohort default rate comparisons can be misleading. Because guarantors vary widely in their scope of services and the mix of postsecondary-institution types that they serve, comparisons between guarantors with roughly similar default rates can be misleading. Instead, compare the guarantor's overall default rate to the national rate and also consider the guarantor's default rate by institution type. The average 2001 cohort rate for all guarantors was 5.6 percent. USA Funds' 2001 cohort rate was 4.5 percent. USA Funds®' 2001 cohort rate is broken out by institution type in the table below.
Consider the improvement in a guarantor's default rate. A better indicator of a guarantor's default-prevention success is the improvement in its cohort default rate over time. For example, USA Funds recorded a 26-percent decline in its cohort rate between 2000 and 2001. This change represents the largest percentage improvement of any of the nation's 10-largest guarantors by loan volume. In addition, since 1994, USA Funds has reduced its cohort rate by more than 61 percent.
Consider indicators of future default-prevention success. Although the two-year cohort rate is the most-publicized default measure, it's actually a lagging indicator. A more-current indication of default-prevention success is provided by a guarantor's so-called trigger default rate. This rate measures a guarantor's dollars of default in a given fiscal year against a guarantor's total loan dollars in repayment. For fiscal 2003, USA Funds recorded a trigger default rate of 1.37 percent, a 30-percent reduction from the previous year's rate of 1.97 percent. This improvement bodes well for future reductions in USA Funds' cohort rate.
Consider a guarantor's investment in default-prevention services. Take into account the effort that a guarantor makes to help borrowers avoid default. For example, USA Funds supports a team of 200 full-time professionals who contact borrowers who are 60 days or more behind in their loan payments. Backed by the latest technology and an innovative statistical model that predicts default risks, these default-prevention specialists make more than 20 million phone calls annually to counsel borrowers about the best options for resolving their loan-payment problems. During fiscal 2003, USA Funds' default-aversion activities resolved more than 1 million seriously past-due student-loan accounts, thereby preventing nearly $10.9 billion in loan defaults. The default-prevention professionals who counsel USA Funds' borrowers successfully prevented default on more than 93 percent of those accounts.
Take into account a guarantor's support of your default-prevention efforts. USA Funds offers its customers a comprehensive array of debt-management tools. Members of our debt-management team conduct free one-on-one consultations with financial-aid staff to assess current campus practices and suggest improvements. USA Funds sponsors workshops that share best practices in debt management. We provide a free online resource that includes advice, tools and other resources for enhancing campus default-prevention programs. Our free financial-literacy program, USA Funds Life Skills®, is helping more than 470 postsecondary institutions prepare their students to successfully complete their studies on time, with a minimum of debt and equipped to repay their student loans. In addition, USA Funds supplies postsecondary institutions with free Default Management SystemTM (DMS) software to stay in touch with their borrowers through repayment of their loans. This PC-based software permits financial-aid administrators to easily carry out letter, e-mail or telephone campaigns to their borrowers.
Learn more about USA Funds' array of debt-management services, or participate in one of our periodic Debt-Management Institute tours.
2001 National Cohort Default Rate, USA Funds’ Default Rate by Institution Type
| Institution Type |
National Average |
USA Funds’ Rate |
| Public, all |
5.3% |
5.0% |
| Public, less than 2 years |
7.2% |
8.7% |
| Public, 2-3 years |
8.6% |
7.8% |
| Public, 4 or more years |
4.4% |
4.0% |
| Private, all |
3.5% |
2.7% |
| Private, less than 2 years |
9.3% |
6.9% |
| Private 2-3 years |
6.8% |
5.8% |
| Private, 4 or more years |
3.3% |
2.6% |
| Proprietary, all |
9.0% |
6.3% |
| Proprietary, less than 2 years |
10.8% |
6.2% |
| Proprietary, 2-3 year |
9.3% |
6.6% |
| Proprietary 4 or more years |
7.4% |
6.1% |
| Foreign |
2.3% |
1.9% |