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 Federal Student Loan Cohort Default Rates and Related Issues 

3/12/2014

As a sector, our colleges now have a 3-year Cohort Default Rate (CDR) of 20.9%, although fortunately only 19% of all community college credit students borrow. Defaults of this magnitude not only cripple the financial futures of the students who default, but raise the specter of severe institutional penalties. While we hope that default rates will abate, there is no certainty. 

Movement to 3-Year CDR and Related Institutional Sanctions

A 3-year CDR is replacing the previous 2-year measure, and higher calculated default rates are the result. In September, the U.S. Department of Education (ED) will release the first official 3-year CDR for which institutions will be subject to sanctions, including losing eligibility to participate in the Federal Loan and Pell Grant programs. On February 18, 2014, ED released the Draft CDRs. The draft CDRs are sent only to schools and not publicly released, unlike the official rates.

The 3-year CDR measures the number of borrowers who entered repayment in a given fiscal year, compared to the number of students who default before the end of the second fiscal year following the fiscal year in which repayment begins.

An institution can lose eligibility to participate in the Federal Direct Loan and Pell Grant programs when

  • Its three most recent official CDRs (released in September 2014) are 30% or greater.
  • Its CDR is greater than 40% for any single year.

An institution that has a 3-year CDR equal to or greater than 30% for any 2 of the 3 years may be placed on provisional certification. This means that the school must revise its default prevention plan and submit the plan to ED for review. It may also have its certification withdrawn at the Department’s discretion without advance notice and without a formal appeal.

Lastly, an institution that has a 3-year CDR equal to or greater than 30% for any year must establish a default prevention task force and prepare a default prevention plan which it must submit to ED for review. This sanction was applied to the FY 2010 CDR released in September 2013.  

Background on CDR, Community College Borrowing, and Institutional Policy

The CDR has been and continues to be criticized for being at best a crude measure of institutional quality. Numerous studies have shown that factors other than the institution attended are related to default. Not surprisingly, a student’s socioeconomic background, particularly income, is highly correlated to default. Community colleges disproportionately serve those who do not complete and therefore are more likely to default: non-traditional students, working adults, often with dependents of their own who delayed postsecondary education and attend part time. The economy, and particularly the unemployment rate, also influences repayment. 

Some colleges have chosen to voluntarily leave the loan programs, for fear of the consequences of high student default rates, or because campus officials do not think that borrowing is broadly appropriate. Institutions have to make this tough call for themselves, but we note that many members of Congress find this practice troubling, because they want students to be eligible for all the federal aid programs.

AACC’s Legislative and Regulatory Agenda Concerning Student Defaults

AACC continues to direct a great deal of its advocacy and policy efforts on complications that have arisen for institutions with high CDRs for the federal loan programs.  Some advances have been made but the list of changes we are seeking remains long.  AACC’s federal public policy agenda is fundamentally geared towards limiting borrowing amounts wherever possible—enhanced of course by relatively low institutional tuitions—and creating attractive repayment terms. AACC seeks the following, primarily through the Higher Education Act reauthorization:

  • Limit Borrowing at AA Level—Currently, there is an aggregate cap on borrowing at the undergraduate level, but none for associate degree programs.  AACC believes that borrowing eligibility for these programs should be half that for bachelor’s degree programs.
  • Link Borrowing Limits to Attendance Intensity—Loan limits should be prorated for enrollment status, e.g., a half-time student should only qualify for half the loan that a full-time student receives.
  • Allow Institutions to Limit Loan Limits for Certain Categories of Students—When it comes to appropriate borrowing, one size does not fit all.  Community colleges should be able to set different, and lower, levels of loan eligibility for certain categories of students, particularly those at risk of not completing.
  • De-Couple Pell Eligibility From That for Loans—As explained above, loss of institutional loan eligibility due to high default rates also carries with it the loss of Pell Grant eligibility. This link should be terminated; low-income students should not be denied access to Pell Grants because of the practice of former students, whatever their reason for default.
  • Increase Participation Rate Index (PRI)—Institutions that have relatively few students who borrow (less than about 21% of all eligible students) can have higher default rates than the formal thresholds and still not suffer sanctions.  The PRI should be increased to reflect increasing borrower incidence.
  • Regulatory Changes—ED has not acted aggressively or proactively to implement common-sense policies related to community colleges with high default rates.  Among other things, AACC has formally requested that ED allow colleges to file PRI appeals before they face an impending loss of institutional eligibility, permitting PRI appeals for any year in which their default rate exceeds 30%.

AACC’s formal Higher Education Act reauthorization proposals (submitted with ACCT) can be found online [PDF]. 

Looking Forward: What A College Can Do to Protect Against Default-Related Penalties

About 7 months transpire between the release of the draft and official CDRs; therefore, all schools should review for accuracy the data that are used to calculate the rates, as well as the rates themselves. Colleges can take a number of actions in response to these draft CDRs and later to the official CDRs, for accuracy or other reasons. These actions, which are categorized as challenges, adjustments, and appeals, are explained fully in ED’s Cohort Default Rate Guide [PDF]. The guide also contains information about how the rates are calculated, their effects on institutions, and offers specific procedures for reviewing, monitoring, and responding to the rates and loan data. All institutions should make sure that they are familiar with the basics of this publication so that they can proactively monitor their default situation, and be ready to act when necessary.

In addition, based on ED data, AACC recently sent to institutions that have had high CDRs a letter [PDF] that spelled out the consequences that might result from the official FY 2011 default rates that will be published later this year, along with options for minimizing any potential institutional sanctions tied to a college’s default rate. Policies attending eligibility for the loan programs are so byzantine that many institutions are not fully aware of them.

As a preemptive measure to prevent students from borrowing excessively, we encourage colleges to offer financial literacy courses and default prevention programs to encourage responsible borrowing and to inform students of the severe consequences of defaulting on student loans. There are increasingly good models being developed to help students be savvier consumers.

There are several sources of useful information to institutions about debt management and loan default and delinquency prevention, including the ED Federal Student Aid website and the National Association of Student Financial Aid Administrators (NASFAA). State examples include the Missouri Department of Education’s debt management and default prevention initiative; the Finance Authority of Maine Model Default Prevention Plan [PDF]; the New York State Financial Aid Administrators Association’s The NY Statewide Default Prevention Project; the Student Loan Guarantee Foundation of Arkansas Managing Debt and Avoiding Default; and in progress is the California Community Colleges Chancellor’s Office Default Prevention Initiative.

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