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Business Officer Magazine

Minding Your Loan Business

Out of sight, perhaps. But while outsourcing student loan administration can free up staff to focus on customer service and counseling, relationships with outsource partners need to stay top of mind as loan programs grow increasingly complex.

By Karla Hignite

Ralph Hosterman admits that if Pennsylvania State University didn’t have five seasoned IT staff dedicated to its bursar office or the well-established infrastructure that comes with educating 84,000 students, he would consider outsourcing components of his loan program. As director of student loans and scholarships, Hosterman and his staff manage everything in-house for loan funds in the neighborhood of $217 million in Stafford, $80 million in PLUS (Parent Loans for Undergraduate Students), $70 million in private, and $8 million in Perkins. Something else that might prompt Hosterman to outsource would be the departure of his in-house Perkins experts.

The sheer complexity of complying with requirements for federal loan administration is enough to convince some institutions to partner with a loan servicer to provide due diligence and processing support within this detail-driven industry. A small institution like Wheaton College, Norton, Massachusetts, is unlikely to hire someone to focus on credit bureau and National Student Loan Data System reporting for the 400 Perkins loans awarded on average annually to its 1,500 undergraduates, says Charlene Reynolds, student accounts manager. Mid-size and large institutions are also likely to want to shed these activities, which require significant expertise and constant attention.

While Temple University, Philadelphia, has outsourced servicing of its 12,000-plus Perkins loans for the past 30 years, staff are now in the midst of an RFP for additional services, including forms processing and due diligence, says Bursar David Glezerman. In 1997 when the federal government first required reporting for Hope scholarship tax credits, Glezerman outsourced that from the start, knowing his division lacked the resources to develop a program from scratch in time to comply that first year. “By outsourcing, we not only complied with the spirit of law, but our provider worked directly with the feds to flesh out requirements that weren’t clearly defined,” he says. “In the case of such unfunded mandates, it costs every institution whether it decides to outsource or not.”

Not surprisingly, a general squeeze on staff and technology resources is a common reason for farming out loan administration functions. In today’s mature student loan servicing industry, colleges and universities can outsource everything from billing and collection to loan deferment and cancellation processing to borrower communication to document management and storage (see sidebar, “Commonly Outsourced Services”). Specifically what and why institutions outsource may hinge more on internal circumstances and priorities than on institution type or size. But growing concern about rising student debt is also behind efforts to streamline loan administration and spend more time educating borrowers about financing education.

Should It Stay or Go?

According to Hosterman, departmental decisions to replace vacant staff assistant positions with additional IT support have paid off: The result has been efficiency in a loan servicing environment heavily dependent on transactions and data reporting. Penn State introduced electronic signature for master promissory notes in 2001; today 99 percent of students sign electronically. “That alone alleviated significant paper pushing,” says Hosterman.

While loan processing at Boston College remains in-house, Kathy Rosa lives a different reality. Her work-study students and staff still routinely stuff paper promissory notes. “At the very least, we know we need to upgrade to a Web-based system,” says Rosa, manager of campus-based loans. Five years ago she investigated loan service providers, but at that point, the college wasn’t ready to make the financial commitment. Features such as e-signature, online authentication, and electronic promissory note generation were mostly a glimmer. Now that she is re-engaging the outsourcing option, she is pleasantly surprised to find how far loan servicers have advanced with their offerings. “I won’t have a budget to allocate until 2007, but high on my priority list is real-time payment for borrowers and online exit interviews,” she notes. She also wants to rid staff of routine address changes and phone calls so they can focus on collections.

One thing Rosa won’t be quick to outsource is processing of Perkins loan deferments and cancellations. While the federal Perkins program represents a small portion of the overall loan program for some institutions, Perkins is almost the whole pie for Boston College. Its robust $38.7 million Perkins fund balance—built up over 40 years—allowed the institution to lend $7.7 million in Perkins loans to 1,700 undergraduate and 1,500 graduate students in 2004-05. “Because cancellations in particular carry a residual effect on our ability to lend to future students, we are vigilant when it comes to compliance and repayment of debt,” says Rosa. If she did outsource this function, Rosa would have a solid benchmark by which to monitor a provider’s performance. “Historically our Perkins cancellations have averaged $500,000 annually. If I saw cancellations suddenly rise to $1 million, I would pull compliance back in-house.”

Reynolds, on the other hand, is happy to relinquish control of the increasingly onerous task of Perkins compliance. “Fifteen years ago the regulations weren’t nearly as complicated as they are today,” she says. While time consuming, exit interviews are the one activity she won’t farm out. “This is our last chance to impress upon students what they need to do to stay out of default once they leave school. And it provides an opportunity to have students focus on combined debt from all sources.” Reynolds conducts exit interviews one-on-one or in small groups. “There’s really no way a large university could do this. Because we are small, we can have that final, personal contact with students to stress the importance of loan repayment.”

Glezerman’s ultimate outsourcing aim is to systemize processes so that staff can conduct more debt counseling and better manage delinquent accounts. To get there, he’s thinking about outsourcing document imaging of forms and data warehousing of records. Report readability and how well transactions will mesh with Temple’s internal systems, including accounting, are key criteria. “Does the provider have a package so that the university can function like an internal collection agency? What about reporting on student loan interests for the IRS 1098T tax reporting? It’s also good to ask about services related to education financing and student loan counseling, even if you aren’t at a point to outsource those functions,” Glezerman advises.

Resizing Operations

Commonly Outsourced Services

Among the loan services that institutions outsource:

  • Monitoring new federal regulations and maintenance of existing regulatory procedures (i.e., due diligence communications with borrowers)
  • Borrower correspondence and call processing, inbound and outbound
  • Billing statements, coupon books, automatic direct draft
  • Lockbox services
  • Student loan account maintenance
  • Collection agency interface, including automatic first and second placements
  • Web access for electronic entrance and exit counseling process
  • E-signature process for electronic promissory notes
  • Credit bureau reporting
  • Credit dispute processing
  • Forbearance and hardship decision support and forms processing
  • File management, including promissory notes
  • Refund check processing
  • Fiscal Operations Report and Application to Participate (FISAP) reporting support
  • National Student Loan Data System (NSLDS) load error report processing
  • National Student Clearinghouse interface and reporting
  • Paid-in-full processing
  • Loan verification certificate completion (for loan consolidation)
  • Loan assignment processing (to Department of Education)
  • Default prevention services

Reallocating how staff spend time has been a work in progress for Sandie Rosko, manager of student fiscal services for the University of Washington’s main campus in Seattle. As a result of budget cuts, UW’s collection office dwindled from six people to three from 1990 to 2000. “Outsourcing was inevitable,” says Rosko. As a direct lending institution with a loan volume of $142 million, UW offers long-term institutional loans primarily to its law and medical students as well short-term, 90-day notes. About 6,000 of UW’s 42,000 students receive institutional loans. Some of these students are also among the university’s 4,600 Perkins recipients.

UW was previously using a collection agency, but it wasn’t sending anything out until 190–210 days past due. Up to that point, staff were also fully processing loans in-house, including forms, deferments, and all borrower communication, says Rosko. Between a stressed-out staff and her concern that an inability to keep up with federal regulations might make the institution vulnerable, Rosko and her staff reassessed operations. Their RFP encompassed aspects of the collection process, customer service, accounting requirements, and reporting needs. After narrowing 23 contenders to 3 collection agencies and a loan servicer, staff now send all long-term institutional and federal loans to the agencies 90 days past due, following early intervention calls made by their loan servicer.

Thoughtful decisions about what to outsource also provided an opportunity to reclassify staff to create two professional-level positions to oversee, reconcile, and monitor the work of agencies; reconcile inventories; and assist students, says Rosko. That shift in staff time has likewise made it possible to address what she sees as an emerging need: more time counseling students. Her staff now spend about 60 percent of their time in person or on the phone in an advising capacity, talking to students about loan repayments, consolidations, budgeting, and debt management. Comparing operational costs of UW’s former six-person office and the current three-person outsourced model reveals decreases in salaries (43 percent), phone expenses (93 percent), supply costs (82 percent), and postage (40 percent). Increases in staff travel costs (84 percent) and conference expenses (37 percent) aren’t of concern, she says, since a primary goal in outsourcing has been to shift focus to assist and educate students.

Although it’s difficult to document the results of increased involvement with students, Rosko and her staff have begun monitoring repayment rates for 90-day institutional short-term loans. “That’s where most students are likely to get in trouble early,” she says. After working for 19 years in student loan administration, Rosko is keenly aware of a larger issue surrounding student lending—namely, rising debt levels for students. One significant change her department has accomplished has been working with UW’s school of medicine to reduce interest rates on long-term institutional loans—which can total as much as $60,000 per student—from 9 percent to 5 percent. Another change has been to provide more deferment options for students to help them succeed with repayment.

Rosko is not alone in her concern about the growth in student debt. Reynolds has noticed a creep upward in amounts borrowed by Wheaton students, where about 55 percent are eligible for subsidized Stafford loans and 20-25 percent for Perkins loans. During the past three years, average loan indebtedness for graduating seniors has risen 14 percent, fueled primarily by the increasing use of private student loan programs, notes Reynolds. Glezerman’s analysis of Temple’s Perkins recipients reveals that the highest-need students received $1,210 in Perkins funds in 2004-05 compared with $922 five years ago. “One reason institutions must keep a serious eye on student debt levels is because debt burden can become an indicator of student success down the road, impacting the ability of students to complete educational programs as well as decisions about educational directions and career choices,” says Glezerman.

Dealing With Debt

A combination of outsourcing and internal reorganization has allowed Southern Methodist University staff to assume a greater role in student debt awareness raising. Six years ago, Dallas-based SMU re-engineered its student financial services, financial aid, registrar, and undergraduate admission into a division of enrollment services that includes SMU’s student loan programs. “Since we came together as a division, we discuss expenses more often and much earlier,” says Pat Woods, executive director for enrollment services and university bursar. No longer relegated to standing at a counter taking payments, her staff accompanies SMU undergraduate admission recruiters to talk with students and parents about how to prepare financially for college.

Collections Among Topics at Student Financial Services Conference
Managing tuition receivables and collecting student debt are among topics to be discussed at NACUBO’s fourth annual Student Financial Services Conference, March 5–7 at the historic Peabody Memphis Hotel in Tennessee. David Glezerman, bursar at Temple University, is a key presenter. Exploring ways to streamline operations and increase efficiency in all aspects of student financial services will be addressed in several sessions, including “Using Business Intelligence Wisely,” “Innovations in E-business Applications,” and “Developing Knowledge Workers.” For a more complete overview of the conference, see page XX. Also, on Sunday, March 5, from 8:00 a.m. to 2:00 p.m., NACUBO will collaborate with ACA International, the Association of Credit and Collection Professionals, to present ACA’s Higher Education Collection Practices Seminar. Designed for both new employees and veterans, the seminar provides the ins and outs of student loan programs and fulfills one of the requirements toward ACA’s Higher Education Collection Specialist designation. For complete information and to register, visit or call 952.928.8000, ext. 211.

“One thing we stress is identifying disposable income that can be paid each month to decrease the amount that students must borrow,” says Woods. SMU also emphasizes the benefits of payment plans as an alternative to taking out large loans. “We don’t talk anyone out of getting a loan, but we do try to help students and parents think twice about how much they borrow and from what sources.”

SMU offers two institutional loans in addition to about 400 Perkins loans awarded annually, mostly to graduate students. One is based on income and one is available to any student “to help fill the gap,” explains Woods. Approximately 900 of the university’s 8,500 FTEs also participate in a private loan program of some sort. In response, SMU has developed a preferred lender list as a way to impose processing standards for lenders.

In reality, private loan lending comprises an increasing share of student borrowing these days. According to The College Board’s 2005 Trends in Student Aid report, the growth in nonfederal, or private, loans has increased from 6 percent of total loan dollars in 1996-97 to 18 percent in 2004-05.

That growth bears out at Penn State, where private loan volumes have mushroomed from less than $1 million 10 years ago to $70 million today, says Hosterman. Penn State reflects another Trends finding: PLUS loans represent the fastest-growing category of student-related aid during the past decade. According to Hosterman, Penn State’s PLUS loan volumes have doubled to $80 million during the past five years. And Penn State is not alone. In Hosterman’s conversations with colleagues, other Big 10 institutions indicated that they are likewise witnessing dramatic increases in private and PLUS loan volumes, due in part to state cuts to student financial aid as well as flat family earnings and stagnant federal levels of both grant and loan aid.

“At some point, $8 million in Perkins isn’t much compared to $80 million in our PLUS loan program,” he says. He’s not overly concerned about speculation surrounding discontinued federal funding of the Perkins program, although it has made him consider his institution’s response and whether the university would attempt to raise funds for a similar type of university loan program.

Federal loans likewise continue to grow at a slower rate than do other types of loan aid to students at Duke University, Durham, North Carolina, which processes roughly $40 million annually in Stafford, $12 million in PLUS, $8 million in various institutional loans, and about $6 million in Perkins. With increased costs associated with regulatory compliance, a nagging question for Jim Belvin, Duke’s director of financial aid, is how much longer the institution can afford to administer federal funds, particularly if the interest subsidy associated with Stafford loans is eliminated or reduced significantly. “The bottom line is that we are going to make loans to students,” says Belvin. “What we may do in the absence of any federal program is find other efficient vehicles for funding students.”

The 15-year-old Duke Educational Assistance Loan—originally created as a loan program for students who did not qualify for a subsidized Stafford loan—was essentially cocooned with the emergence of the unsubsidized Stafford loan. Recently DEAL has found new favor in an environment of increased borrowing, says Belvin. “Over the years, we’ve added new programs, expanded others, and developed several endowed programs. We constantly try to keep our heads up to create programs supportive of what students and parents need.”

Mark Olson, executive vice president of marketing and sales for Campus Partners, a loan servicing and facilitation company, says that the tremendous growth in alternative, private, and institutional loan programs brings an array of complex administrative and financing challenges. “Because business officers have responsibility for managing campus-based loan programs while working with their counterparts in financial aid, they must ensure these loan programs are managed effectively and efficiently,” says Olson. “Often outsourcing provides a sound business alternative, and in some instances, new financing alternatives for the loan programs themselves.” And, as a host of new private loan programs has emerged with unique origination, disbursement, and servicing requirements, service providers must offer institutions outsourced student loan facilitation solutions that ease the administrative burden while addressing institutional financing challenges, Olson notes. In a word: simplification.

Seamless Service

As Woods sees it, getting good service from providers entails giving good service back. “You can’t passively manage a provider relationship.” With every process she outsources, Woods dedicates a staff member to that relationship and ensures that staff stay knowledgeable. “We always send appointed staff for training with our providers and to at least one conference a year on loan collections and administration so that our own staff are up to date.”

For Rosko, key to maintaining a strong outsourcing partnership is having and communicating expectations. Hers include availability to students and staff and flexibility to add new services as needed. “Ultimately, we want our providers to look to us as process partners,” she says, “working together for the good of students.”

In or Out?
Do you outsource student loan administration or handle it in-house? Tell us the pros and cons of either approach; e-mail

That collaborative spirit applies to internal working relationships as well. Glezerman’s office developed a forecasting model to help Temple’s financial aid office determine award allocations. “Knowing how much is available for future lending is critical,” says Glezerman. “Ultimately we’re all working together to help students get an education and pay their obligations so that future students can do the same.”

Hosterman’s department also works closely with the university’s student aid office to eliminate duplicative efforts. The two offices share entrance and exit counseling responsibilities and collaborate on feedback to students. In addition to migrating loan information to Penn State’s Web site, Hosterman’s office developed an e-mail system to channel student questions to the most appropriate responders. “The beauty is that students don’t know whether they are talking to a financial aid person or the bursar,” says Hosterman. He believes that with more being driven by Web-based applications, a definite upside for students is that transactions appear much simpler to them, even though loan processing as an industry has grown increasingly complex.

That kind of behind-the-scenes technology benefit has immense appeal to Rosa. If she decides to partner with a loan servicer to provide a Web-based interface for loan processing, she takes comfort in knowing that a Boston College-branded site will still provide a sense of continuity for students. “Ultimately, if borrowers can get the information they want, how they want it, and when, I think that supercedes who is providing the service.”

Karla Hignite, principal of KH Communication, Tacoma, Washington, is senior editor of Business Officer.