The Economy and Collections

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The Economy and Collections

• Mike Bryant
• US Dept of Education

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The Economy and Collections

• Disclaimer
• This session will make no effort to predict the
  future of the US economy!

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The Economy and Collections

• As will become clear, making sense of the past is
  confusing enough.

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The Economic Situation

• Quarterly Economic Growth Rate
• Source U.S. Dept of Commerce website
  www.bea.doc.gov
• Note the recession technically ended in late 2001

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The Economic Situation

• Personal Income (Quarterly)
• Source U.S. Dept of Commerce website
  www.bea.doc.gov

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The Economic Situation

• Wages and Salaries (Quarterly)
• Source U.S. Dept of Commerce website
  www.bea.doc.gov

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The Economic Situation

• Unemployment Rate
• Source U.S. Department of Labor website
  www.bls.gov

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The Economic Situation

• Unemployment Rate in Perspective 1948 - 2002
• Source U.S. Department of Labor website
  www.bls.gov

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The Economic Situation

• Unemployment Rate in Perspective 1948 - 2002
• Source U.S. Department of Labor website
  www.bls.gov
• Average Unemployment Rate Since 1948 5.6
• Average Unemployment Rate Since 1972 6.3
• Current Unemployment Rate 6.0

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The Economic Situation

• In Summary
• Overall economic growth appears to be back on
  track
• Personal income is still growing
• Unemployment is higher than weve seen for the
  past five years, but not particularly high in
  historical terms

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The Economic Situation

• Factors Contributing to Negative Perceptions
• Wall Streets precipitous decline since March,
  2000
• Scandals and bankruptcies Enron, Worldcom and
  United Airlines
• Post-9/11 pessimism and anxiety

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Logical Expectations

• In general, one would expect that
• Front-line, voluntary borrower payments would be
  the most sensitive to economic conditions
• FFEL consolidation and rehab would suffer, but
  the decline would begin a few months after
  front-line collections fall off
• Wage garnishment payments would decline, but not
  necessarily in step with front-line collections
• TOP collections would decline in the year
  following an economic downturn

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Expectations vs. Reality

• Front-Line Collections
• 1999 - 282 million
• 2000 - 294 million
• 2001 - 294 million
• 2002 - 327 million

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Expectations vs. Reality

• Huh?

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Expectations vs. Reality

• Statistical Pitfall 1 Inventory Size
• 1999 - 10.44 billion
• 2000 - 11.34 billion
• 2001 - 11.37 billion
• 2002 - 12.48 billion

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Expectations vs. Reality

• Front-Line Collections as a Percent of Inventory
• 1999 - 2.76
• 2000 - 2.59
• 2001 - 2.58
• 2002 - 2.62
• Estimated dollars lost 57 million
• Controlling for inventory, the results were about
  what we might expect from a mild economic
  downturn that began in 2000.

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Expectations vs. Reality

• But wait, theres more

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Expectations vs. Reality

• During that same period, though, ED shifted its
  emphasis from consolidation to rehabilitation, so
  the economic effects were probably somewhat
  greater than they seem. Hence
• Statistical Pitfall 2 Strategy changes

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Expectations vs. Reality

• Consolidation Rehab Recoveries
• 1999 360 million
• 2000 422 million
• 2001 518 million
• 2002 462million

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Expectations vs. Reality

• Consolidation Rehab Recovery Rates
• 1999 3.45
• 2000 3.73
• 2001 4.56
• 2002 3.70

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Expectations vs. Reality

• Consolidation Rehab Recovery Rates
• Not at all what I would have predicted!

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Expectations vs. Reality

• Cons/Rehab vs. Front-Line

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Expectations vs. Reality

• Cons/Rehab vs. Front-Line
• Possible explanation fewer people are able to
  pay in full or compromise during an economic
  downturn, and therefore turn to
  consolidation/rehab.
• In short, an inverse relationship might exist
  between front-line collections and cons/rehab
  during economic downturns.

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Expectations vs. Reality

• Wage Garnishment Recoveries
• 1999 70 million
• 2000 110 million
• 2001 134 million
• 2002 136 million

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Expectations vs. Reality

• Wage Garnishment Recovery Rates
• 1999 0.68
• 2000 0.97
• 2001 1.18
• 2002 1.09
• Important mitigating factor ED did its first
  match with the National Database of New Hires
  (NDNH) in early 2001. Did I mention...

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Expectations vs. Reality

• Wage Garnishment Recovery Rates
• Statistical Pitfall 3 New collection tools

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Expectations vs. Reality

• Treasury Offset Recoveries
• 1999 505 million
• 2000 431 million
• 2001 451 million
• 2002 369 million
• But 2001 included the one-time tax rebate
  offsets, which we estimate totaled about 50
  million

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Expectations vs. Reality

• Treasury Offset Recovery Rates
• 1999 4.84
• 2000 3.80
• 2001 3.52
• 2002 2.96
• 2001 rate has been adjusted to show rate without
  effect of rebates

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Expectations vs. Reality

• Treasury Offset Recovery Rates
• TOP recoveries and recovery rates began declining
  before there was any sign of economic downturn
• This decline is in spite of the new inclusion of
  social security benefit offsets and of a larger
  average offset amount per borrower
• We dont have a good theory as to why

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The Economy and Collections

• Overall Recovery Rates
• 1999 11.81
• 2000 11.49
• 2001 12.80
• 2002 10.58

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The Economy and Collections

• Conclusions
• Aside from overall declines in 2002, its tough
  to find a consistent correlation between
  collections and economic indicators
• Given the drop in 2002, unemployment rates seem
  to have the largest impact on collections
• Adverse economic effects can be offset by changes
  in strategy and/or use of new tools

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Questions?

• Mike Bryant
• US Dept of Education
• Michael.Bryant_at_ed.gov
• 319-339-6550

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The Impact of the Economy on Student Borrowing

• Dr. Jennie H. Woo
• EDFUND

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Title Wave II

• Census projections show a steady increase in
  young people aged 18 to 24 years.
• This group is currently 26 million and is
  expected to grow to 30 million in 2010.

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Off to College

• Department of Education projections show
  enrollment increases in higher education from 16
  million in 2003 to 18 million in 2010.
• College-going rates for high school graduates
  have been increasing.
• State budget deficits could threaten the number
  of spaces available in colleges and universities.

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The Value of a College Degree

• In 1999 the median annual income of men with BAs
  was 60 more than those with a high school
  degree. For women, it was 65 higher.
• The short-term labor market for college grads has
  worsened.
• In the long-term the premium for a college degree
  still appears strong.

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The Cost of College

• Tuition has been rising steadily, usually
  substantially above consumer prices and median
  family incomes.
• Over the decade between 1990 and 2000, tuition in
  constant dollars at public four-year institutions
  rose 42.
• Due to budget deficits and the economic slowdown,
  families will have to pick up the slack and pay
  more.

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Student Aid is Loans

• Loans now comprise almost 60 of all student
  financial aid.
• The value of grants, both state and federal, has
  eroded over time.
• Regulation changes can have a huge impact on the
  demand for loans. If loan limits increase
  borrowing will expand.

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Becoming a Borrower

• The proportion of college students who borrow has
  increased from 19 in 1991 to 29 in 2000.
• Half of all borrowers attend four-year public
  schools and one-third attend four-year private
  schools.
• In 2000, the personal savings rate hit a record
  low of 1 of disposable personal income.

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Causes of Default

• Employment and wage levels have big impacts on
  defaults.
• Other factors also affect default rates such as
  the risk composition of students.
• Regulatory change of default definition and
  emphasis on default prevention have also played
  major roles.

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Future Trends

• Demographic, enrollment, and tuition trends and
  higher demand for degrees point to higher
  borrowing.
• Government budget deficits spell fewer sources of
  grant aid and lower subsidies for higher
  education.
• Higher unemployment and lower real wages means
  higher default rates.

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THANK YOU!

• Jennie Woo
• EDFUND