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Cohort Default Rates

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This section of FinAid provides background information concerning cohort default rates (CDR) and changes enacted by the Higher Education Opportunity Act of 2009. This discussion is technical and is unlikely to be of interest to consumers.

Last updated: December 21, 2010

Definition of Default for Federal Education Loans

Section 435(l) of the Higher Education Act of 1965 defines a federal education loan that is paid in monthly installments to be in default if the loan is more than 270 days delinquent. (For loans that are paid in less frequent installments, the threshold is 330 days.) The regulations at 34 CFR 682.200(b) reflect the statute.

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The 270-day threshold was established by the Higher Education Amendments of 1998 (PL 105-244) effective for delinquencies occurring after enactment on October 7, 1998. Before then the threshold was 180 days. The 180-day threshold was established by the Consolidated Omnibus Budget Reconciliation Act of 1985 (signed into law on April 7, 1986) which changed the definition of a default on federal education loans from a delinquency of 120 days to 180 days. The rationale for the changes was that they would reduce default claims, thereby saving the government money. But the changes also artificially lowered the cohort default rate.

FFEL lenders have 90 days in which to file a default claim. While they are encouraged to file the claim as soon as possible after the loan is more than 270 days delinquent, most wait until near the end of the claim period in order to maximize the accrued but unpaid interest that will be paid as part of the claim. A loan technically isn't in default until the claim is paid, so practically speaking a loan can be up to 360 days delinquent before it is considered to be in default.

The regulations at 34 CFR 668.183(c) define a default as 360 days delinquent for a loan in the Direct Loan program.

Old Definition of Cohort Default Rate

Under the law as it existed prior to the changes made by the Higher Education Opportunity Act of 2008, the cohort default rate was defined as the percentage of borrowers entering repayment in one fiscal year who default by the end of the following fiscal year. This definition appears in section 435(m) of the Higher Education Act of 1965. (If a school has 30 or fewer current and former students entering repayment for attendance at the institution in a given fiscal year, the definition combines the current fiscal year with the two most recent prior years.)

Borrowers who graduate in May usually do not enter repayment until the start of the next fiscal year, as Stafford loans have a six month grace period before entering repayment. (The federal government's fiscal year runs from October 1 to September 30.) So, when combined with the 360 days before a default occurs, this means that there is typically only a one year window during which a default can occur to affect the cohort default rate.

However, borrowers who consolidate their loans lose the remainder of the grace period. In 2005 many borrowers used the early repayment status loophole to consolidate their loans during the in-school period. While Congress subsequently closed this loophole and now disallows in-school consolidations, there are still a large number of students who have lost their grace period because they consolidated the loans and who will enter repayment on their loans shortly after graduation. However, these students are less likely to default because they used the loophole to lock in rates as low as 2.88%, and default rates correlate very strongly with interest rates. But it is also worth noting that because they will be entering repayment a few months before the end of the fiscal year instead of at the beginning, the effective window for a default to occur is narrowed from a year to only a few months. (Borrowers may still consolidate during the grace period and will lose the remainder of the six month grace period if they do so.)

Privileges for a Low Cohort Default Rate

Colleges with low cohort default rates are entitled to a few privileges:

  • Section 428G(a)(3) of the Higher Education Act of 1965 waives the multiple disbursement rule for colleges with a cohort default rate that is less than 10% for three years in a row.

  • Section 428G(b)(1) of the Higher Education Act of 1965 waives the 30-day disbursement delay for first-time first-year undergraduate borrowers for colleges with a cohort default rate that is less than 10% for three years in a row.

  • Section 435(d)(2)(E) of the Higher Education Act of 1965 requires school as lender schools to have a cohort default rate of less than or equal to 15%. (This was amended by the Higher Education Reconciliation Act of 2005 (PL 109-171) on February 8, 2006. Prior to this amendment, the threshold was 10%.)

Sanctions for a High Cohort Default Rate

Colleges with high cohort default rates can lose eligibility for federal student aid programs as follows:

  • Section 435(a)(2) of the Higher Education Act of 1965 suspends eligibility for FFELP loans for the remainder of the current fiscal year and the two following years for any college with a cohort default rate of greater than or equal to 25% for three years in a row. This suspension is appealable. The threshold was previously 30% in FY1993 and 35% in FY1991 and FY1992.

  • Section 401(j) of the Higher Education Act of 1965 specifies that a college is no longer considered an eligible institution based on high cohort default rates for FFELP and DL loans. A college that is no longer considered an eligible institution loses eligibility for federal student aid.

  • The regulations at 34 CFR 668 subpart M clarify the loss of eligibility as follows:
    • 34 CFR 668.187(a)(1) lose eligibility for FFEL and DL loans if the cohort default rate is > 40% in a single year
    • 34 CFR 668.187(a)(2) lose eligibility for FFEL and DL loans and Pell Grants if the cohort default rate is >= 25% for each of the three most recent years
    • 34 CFR 668.187(b) the loss of eligibility is for the remainder of the current fiscal year and next two fiscal years if not successfully appealed

    This is one of the reasons why some community colleges have opted out of the student loan system. A community college that has a cohort default rate that is close to the threshold might choose to stop offering federal education loans in order to preserve its students eligibility for the Pell Grant.

Changes made by the Higher Education Opportunity Act of 2008

Because of concern about the inadequacy of the current definition, Congress made changes in the Higher Education Opportunity Act of 2008 (PL 110-315, August 14, 2008).

Section 436(e) expands the cohort default rate window from 2 years (end of the following fiscal year) to 3 years (end of the second following fiscal year). The reporting of the new cohort default rate will begin in FY2012 (i.e., for borrowers entering repayment in FY2009), but will only be used for sanctions after three consecutive years of new cohort default rate data are available, meaning that there will be no sanctions until FY2011's cohort default rate data is available. Cohort default rate data is typically made available on September 15, so this means that the new definitions will not be effective for sanctions until the start of FY2014.

To compensate somewhat for the effect of the change in definition of the cohort default rate, section 436(a) of the law replaces the 25% threshold in effect for FY1994 through FY2011 with a 30% threshold for FY2012 onward. In addition, section 427 of the law indicates that starting on October 1, 2011 (FY2012), waivers for the multiple disbursement rule and 30-day delay will have the threshold increased from 10% to 15%.

Before Congress passed this law, the US Department of Education ran an analysis of the potential impact of expanding the cohort default rate window from two years to three years (and four years) on FY2004 cohort default rates. While this data has never been officially released, Inside Higher Ed obtained a copy of aggregate data and published a table summarizing the impact. A similar article appeared in the Chronicle of Higher Education. (A subscription may be required.) This data suggests that a 3-year cohort default rate window would increase cohort default rates by 69% overall and by 53% for public colleges, 57% for private colleges, and 94% for proprietary colleges. The projected increase for less than 2 year proprietary institutions was 108%, for 2-3 year proprietary institutions was 97% and for 4-year proprietary institutions was 88%. The following table summarizes the increases in the cohort default rates.

Increases in Cohort Default Rates
(2-year vs 3-year window)
Institution Type FY2004
2-Year Rate
FY2004
3-Year Rate
Percentage
Increase in
Default Rates
Point
Increase in
Default Rates
Public 4.7% 7.2% 53% 2.5%
   < 2-year 5.7% 9.7% 70% 4.0%
   2-3 year 8.1% 12.9% 23% 4.8%
   4-year 3.5% 5.3% 51% 1.8%
Private 3.0% 4.7% 57% 1.7%
   < 2-year 9.0% 18.7% 108% 9.7%
   2-3 year 7.4% 12.2% 65% 4.8%
   4-year 2.8% 4.5% 61% 1.7%
Proprietary 8.6% 16.7% 94% 8.1%
   < 2-year 8.9% 18.5% 108% 9.6%
   2-3 year 9.9% 19.5% 97% 9.6%
   4-year 7.3% 13.7% 88% 6.4%
Foreign 1.5% 2.5% 67% 1.0%
Unclassified 5.5% 10.0% 82% 4.5%
Total 5.1% 8.6% 69% 3.5%

The US Department of Education released preliminary 3-year cohort default rates for FY2005, FY2006 and FY2007 to the public on December 14, 2009. The following table summarizes the increases in the cohort default rates from 2-year to 3-year.

Increases in Cohort Default Rates
(2-year vs 3-year window)
Institution Type FY2007
2-Year Rate
FY2007
3-Year Rate
Percentage
Increase in
Default Rates
Point
Increase in
Default Rates
Public 5.9% 9.7% 64% 3.8%
   2-year 9.9% 16.2% 63% 6.3%
   4-year 4.4% 7.1% 64% 2.7%
Private 3.8% 6.5% 71% 2.7%
   2-year 8.7% 16.2% 86% 7.5%
   4-year 3.7% 6.3% 70% 2.6%
Proprietary 11.0% 21.2% 93% 10.2%
Total 6.7% 11.8% 76% 5.1%

Increases in Cohort Default Rates
(2-year vs 3-year window)
Institution Type FY2006
2-Year Rate
FY2006
3-Year Rate
Percentage
Increase in
Default Rates
Point
Increase in
Default Rates
Public 4.8% 7.7% 62% 2.9%
   2-year 8.4% 13.9% 66% 5.5%
   4-year 3.4% 5.5% 61% 2.1%
Private 2.6% 4.5% 76% 1.9%
   2-year 6.5% 13.2% 102% 6.7%
   4-year 2.5% 4.3% 75% 1.8%
Proprietary 9.4% 18.8% 100% 9.4%
Total 5.2% 9.2% 78% 4.0%

Increases in Cohort Default Rates
(2-year vs 3-year window)
Institution Type FY2005
2-Year Rate
FY2005
3-Year Rate
Percentage
Increase in
Default Rates
Point
Increase in
Default Rates
Public 4.3% 7.1% 65% 2.8%
   2-year 7.9% 13.3% 69% 5.4%
   4-year 3.1% 5.0% 61% 1.9%
Private 2.4% 4.2% 74% 1.8%
   2-year 6.0% 12.2% 104% 6.2%
   4-year 2.3% 4.1% 73% 1.8%
Proprietary 8.0% 17.2% 115% 9.2%
Total 4.6% 8.4% 83% 3.8%

Of colleges with more than 30 students entering repayment, 1.0% of public colleges (0.3% of 4-year and 1.4% of 2-year), 1.1% of private colleges (0.6% of 4-year and 5.8% of 2-year) and 14.1% of proprietary colleges had preliminary 3-year cohort default rates in FY2007 over 30%, representing 14 (2 4-year and 12 2-year), 15 (8 4-year and 7 2-year) and 185 colleges, respectively. 3.1% of public colleges (46), 1.5% of private colleges (21) and 13.5% of proprietary colleges (177) have preliminary 3-year cohort default rates of 25% to 30%.

The proprietary colleges exceeding the 30% threshold tend to be among the smaller campuses. The largest enrollments for colleges with preliminary 3-year cohort default rates above the 30% threshold in FY2007 are 5,595 for public 4-year, 9,971 for public 2-year, 2,838 for private 4-year and 1,634 for private 2-year, and 5,087 for proprietary colleges. The larger proprietary colleges with multiple campuses have a variety of tools for reducing their cohort default rates, from aggressive counseling of students to "averaging down" the rates by shifting programs from high-default rate campuses to low-default rate campuses.

Of colleges with more than 30 students entering repayment, 0.1% of public colleges, 0.1% of private colleges and 2.8% of proprietary colleges had preliminary 3-year cohort default rates in FY2007 over 40%, representing 1, 2 and 37 colleges, respectively.

The cohort default rate is a ratio of the borrowers defaulting to the total number of borrowers. A much smaller percentage of the student enrollment, however, defaults on debt, especially at colleges where fewer students borrow to pay for their education. The following table summarizes the ratio of borrowers defaulting to the total enrollment at the colleges.

Ratio of Number of Borrowers Defaulting to Total Enrollment
3-year Default Rate Data
Institution Type FY2005 FY2006 FY2007
Public 0.7% 0.9% 0.9%
   2-year 0.6% 0.8% 0.8%
   4-year 0.8% 1.0% 1.0%
Private 0.9% 1.1% 1.2%
   2-year 3.2% 3.8% 4.1%
   4-year 0.9% 1.1% 1.1%
Proprietary 8.2% 9.5% 10.2%
Total 1.2% 1.5% 1.6%

A total of 215,212 students who attended colleges with preliminary 3-year cohort default rates above the 30% threshold (and more than 30 borrowers in repayment) in FY2007, representing 0.9% of all college students. 148,760 of these (69.1%) were enrolled at for-profit colleges, 53,575 (24.9%) at public colleges and 12,877 (6.0%) at private colleges.

A total of 23,498 students who attended colleges with preliminary 3-year cohort default rates above the 40% threshold (and more than 30 borrowers in repayment) in FY2007, representing 0.1% of all college students. 21,503 of these (91.5%) were enrolled at for-profit colleges, 161 (0.7%) at public colleges and 1,834 (7.8%) at private colleges.

Confusion Concerning the Release Date for 3-year Cohort Default Rate Data

There is some confusion regarding the release date for the new 3-year cohort default rate data. Section 436(e) of the Higher Education Opportunity Act of 2008 amended section 435(m) of the Higher Education Act of 1965 to implement the switch from 2-year to 3-year CDRs. The language in section 436(e)(2) discusses the effective date and transition:

EFFECTIVE DATE AND TRANSITION. -

(A) EFFECTIVE DATE. - The amendments made by paragraph (1) shall take effect for purposes of calculating cohort default rates for fiscal year 2009 and succeeding fiscal years.

(B) TRANSITION. - Notwithstanding subparagraph (A), the method of calculating cohort default rates under section 435(m) of the Higher Education Act of 1965 as in effect on the day before the date of enactment of this Act shall continue in effect, and the rates so calculated shall be the basis for any sanctions imposed on institutions of higher education because of their cohort default rates, until three consecutive years of cohort default rates calculated in accordance with the amendments made by paragraph (1) are available.

The confusion arises because it is unclear whether the FY2009 reference in paragraph (2)(A) is referring to the cohort year or the year in which the data is published.

Most likely the FY2009 reference is referring to the cohort year and not the year of publication, as fiscal year references used to identify a specific cohort default rate always refer to the cohort year. For example, the 2-year CDRs to be published in September 2009 will be referred to as the FY2007 cohort default rates. Also the use of the preposition "for" in "for fiscal year 2009" as opposed to the preposition "in" is more consistent with the use of a reference to FY2009 as the cohort year. Likewise publication year is more consistent when referring to a "report showing default data". Cohort year is much more salient when one is referring to the calculation of cohort default rates. Finally, if Congress intended for the change to take effect with regard to a particular publication year they would have used a date reference and not a fiscal year reference.

Section 436(a)(1)(A) of the Higher Education Opportunity Act of 2008 implements the change from a 25% threshold to a 30% threshold and is set to begin in FY2012. This is not inconsistent with a October 1, 2014 start date for sanctions because section 435(a)(2) of the Higher Education Act of 1965 provides that the cohort default rate must equal or exceed the threshold "for each of the three most recent fiscal years for which data are available" and this condition wouldn't be satisfied until 2014.

In addition, consider the conference report on HR4137 as published on page H7488 of the Congressional Record on July 30, 2008:

The House bill extends the period for which the cohort default rate is calculated by one additional fiscal year. The House bill requires the Secretary to calculate and publish at least once each fiscal year, a report showing cohort default rates and life of cohort default rates for categories of institutions of higher education. The House bill defines ``life of cohort default rate.'' The calculation of cohort default rates using a three-year cohort default rate period will begin with fiscal year 2008. Until three consecutive years of cohort default rates are calculated using the three-year default period, cohort default rates will continue to be calculated and penalties assessed using the two-year default period. Penalties under the three-year cohort default rate will not apply until data for the fiscal year 2010 cohort are available.

The fiscal years were later incremented by one in the final enrolled legislation. This excerpt from the conference report — especially the last sentence — makes clear that the years in question are referring to cohort years and not publication years. Also, the last sentence, when incremented to the FY2011 cohort, is consistent with sanctions going into effect on 10/1/2014 after publication of 3-year CDRs for the FY2011 cohort in mid-September 2014.

Commentary

Shares of a proprietary college fell 17% in early 2009 after a SEC filing in which the company reported that its preliminary cohort default rate under the old definition for FY2009 (2007 data) would be 9.7% to 15.3% compared with its cohort default rate under the old definition for FY2008 (2006 data) of 5.5% to 12.9%. This raised concerns for investors because cohort default rates for proprietary colleges will likely double under the new definition, meaning that a 15.3% cohort default rate is at risk of being above the 30% threshold for federal student aid eligibility.

It should be noted that the college based its report on preliminary data, which is not published by the US Department of Education. The final data for all colleges will be published by the US Department of Education in the fall only after the colleges have had a chance to correct errors in the data. It is not uncommon for colleges to find errors such as defaulted borrowers appearing twice and to reduce their default rates by 0.5% to 2.0% during the appeal process.

In addition, the proprietary college reported the range of default rates for all its schools. Each school's eligibility for student loans is considered separately, so in a worst-case scenario only a fraction of the college's schools would lose eligibility.

Generally speaking, if a proprietary college's FY2008 cohort default rate under the old definition is under 14% it is unlikely to have a cohort default rate under the new definition that puts its eligibility for federal student aid at risk. Moreover, even if college's new cohort default rate is close to the threshold, it has two years in which to try to reduce its default rate through various default aversion techniques, such as requiring borrowers to undergo financial literacy mini-courses and other debt counseling. Colleges with multiple campuses can also transfer programs from a campus with a high default rate to a campus with a low default rate in order to dilute the high default rate by averaging it down. There are a variety of mitigating factors a proprietary college can use in its appeal, such as disproportionately serving low income students who are more likely to default.

If a college is unable to improve the default rates at one of its schools, the college could always choose to opt-out the at-risk schools from the federal loan programs in order to preserve eligibility for the Pell Grant program. Many public community colleges have already pursued this solution.

(It is ironic that a different proprietary college was the target of a class action lawsuit for taking steps allegedly to reduce default rates that are in compliance with the regulations concerning the return of Title IV aid when a student withdraws. Those regulations are intended to minimize the debt of students who drop out by requiring the return of loans before grants, since failure to complete a degree is a key predictor of default.)

The primary drivers of default are interest rates, graduation rates and job placement rates. While federal education loans have had fixed interest rates since July 1, 2006, the FY2007 cohort is the first one with these fixed interest rates. These rates represent an increase as compared with previous years variable interest rates. (Borrowers could lock in the variable rates by consolidating their loans.) So the 6.8% fixed rate in 2006-07 came after consolidation interest rates of 4.75% in 2005-06 and 2.88% in 2004-05 and 2003-04. Borrowers in the FY2007 cohort would have had a mix of these rates and would have had average rates that are at least 1% higher and probably 2% higher than in the FY2005 and FY2006 cohorts. That's enough to have a measurable effect on the default rates. The default rates would also have increased in FY2007 because of a decrease in job placement rates due to the recession and credit crisis.

Database of Default Rates

The US Department of Education publishes national average default rates as well as a searchable database of default rates for individual colleges. There is also a similar tool for the cohort default rates for education lenders.

Older cohort default rate data dating back to FY1992 can be found on the the Default Prevention and Management site, which is used by colleges to manage the CDR data. While this is labeled as the "press archives" the links actually contain spreadsheets containing a raw data dump of cohort default rates for each school as well as other useful data.

That web site also provides historical national average cohort default rates and a chart of cohort default rates by institutional type.

Comparing DL and FFEL Program Default Rates

On March 26, 2009, the US Department of Education published draft national cohort default rates for FY2007 of 6.9%. This is the first time the US Department of Education has published unofficial national default rates based on preliminary data. It is also the first time the US Department of Education has published separate statistics for FFELP lenders (7.3%) and the Direct Loan program (5.3%). (Previous comparisons include one by FinAid involving FY2005 default rate data and one by Student Lending Analytics involving FY2006 default rate data. These analyses yielded default rates that were quite close to the official figures published by the US Department of Education despite using a college-level granularity as opposed to a loan-level granularity.) (The official cohort default rates for FY2007 as published on September 14, 2009 were somewhat lower than the draft rates at 6.7% national, 7.2% FFEL and 4.8% Direct Loans.)

Coincidentally, Sallie Mae published a comparison of its default rates with the Direct Loan program on March 26, 2009, Sallie Mae Helps Students Avoid Negative Impact of Default that claims that the lender has a 30% lower overall default rate than the Direct Loan program. Table 1 of the report claims that Sallie Mae's cohort default rate is 31% lower for public 2-year schools, 27% lower for public 4-year schools, 52% lower for private not-for-profit schools, and 19% lower for private for-profit schools. This analysis is based on the official FY2005 and FY2006 default rate data and uses a methodology that is similar to the ones used by the FinAid and Student Lending Analytics analyses.

Such comparisons between the short-term cohort default rates for FFELP lenders and the Direct Loan program are largely meaningless because each program serves a different mix of schools. For example, the Direct Loan program has many more four-year public colleges, which tend to have lower default rates. Comparing the default rates for the FFEL and Direct Loan program segmented according to level and control of institution demonstrates default rates that are much closer. The following table shows the differences according to institution type (public, private or proprietary). Notice how the differences between the default rates for the two programs are much narrower in FY2005 and FY2006 than in FY2007.

Comparison of FFEL and DL Program Default Rates
Institution Type FY2005 (Official) FY2006 (Official) FY2007 (Draft)
FFELP DL FFELP DL FFELP DL
Public 4.6% 3.5% 5.0% 3.9% 6.8% 4.5%
Private 2.2% 3.4% 2.3% 3.5% 3.9% 3.7%
Proprietary 8.2% 8.3% 9.6% 9.8% 11.3% 11.0%
Total 4.7% 4.1% 5.3% 4.7% 7.3% 5.3%

The following table shows the distribution of each type of college within the FFEL and Direct Loan programs for FY2005, FY2006 and FY2007. Roughly half of the difference between FFEL and DL default rates is due to the distributions, and the rest is mostly due to the differences in default rates for public colleges. The 2.0% point increase in FFELP default rates, as compared with the 0.6% point increase in DL default rates, may be related to the 23% drop in the number of FFELP borrowers entering repayment and public and private colleges. It appears that the colleges that switched from FFELP to DL included many of those with the lowest default rates.

Distribution of Public, Private and Proprietary Colleges
Within the FFEL and DL Programs
Institution Type FFELP DL
FY2005 (Official) FY2006 (Official) FY2007 (Draft) FY2005 (Official) FY2006 (Official) FY2007 (Draft)
Public 46.5% 46.4% 45.8% 70.0% 69.8% 71.3%
Private 30.4% 29.8% 25.6% 17.0% 16.3% 15.7%
Proprietary 23.1% 23.8% 28.6% 12.9% 13.9% 13.0%

There are also different utilization rates for the economic hardship deferment and forbearances in the FFEL and Direct Loan programs. FFELP lenders encourage borrowers to pursue deferments and forbearances as an alternative to default in part because the accrued but unpaid interest in paid as part of a default claim if the borrower ultimately defaults. The Direct Loan program is less aggressive in encouraging forbearances and deferments and so is more likely to see an increase in deferments and forbearances during a recession (as has occurred in FY2007 and FY2008). Since deferments and forbearances count in the denominator but not the numerator when calculating default rates, an increase in deferments and forbearances can suppress an increase in default rates.

In addition, the income-contingent repayment program is available in the Direct Loan program but not the FFEL program. Borrowers in the income-contingent repayment program affect default rates in a similar manner as deferments and forbearances. Approximately 12% of Direct Loan borrowers use the income-contingent repayment plan, with 56% of them having negative amortization (payments below the interest that accrues) and 45% making a "zero" payment.

The cohort default rates starting in FY2005 are also likely distorted by the use of the early repayment status loophole to consolidate loans during the in-school period. Borrowers who took advantage of this loophole to lock in historically low rates would technically have entered repayment early and then immediately been subject to an in-school deferment. They also lost the remainder of their grace period, which could potentially have shifted them from entering repayment near the beginning of a fiscal year to near the end of a fiscal year. So regardless of whether the US Department of Education counted them as part of the FY2005 cohort or as part of the cohort for their graduation year, they would have distorted the cohort default rates for one or more fiscal years. Also, since October 1, 2007, FFELP lenders have been actively discouraging borrowers from consolidating their loans because consolidation loans became uneconomic for the lenders.

The bottom line is that drawing comparisons among loan programs or lenders on the basis of cohort default rates is meaningless because any differences likely have more to do with the selection of colleges within the lender's loan portfolio than the lender's performance in preventing defaults.

Other Measures of Default Rates

The cohort default rate is necessarily a short-term measure of default. There are a few longer-term measures of default rates.

The Education supplement to the President's budget usually includes long term default rate projections. For example, on page 363 of the education supplement to the FY2009 budget, there is a table entitled "Summary of Default Rates" that lists average long-term projected default rates based on the type of loan. Similar data appears on page 388 of the education appendix to the FY2010 budget, page 391 of the education appendix to the FY2011 budget, page 370 of the education appendix to the FY2012 budget and page 402 of the education appendix to the FY2013 budget. The methodology used to determine these projections has never been disclosed.

The US Department of Education has published data concerning lifetime default rates for FY2007 (November 30, 2007), FY2008 (December 9, 2008), FY2009 (December 14, 2009), FY2010 (December 21, 2010) and FY2011 (January 5, 2012). The Microsoft Word file contains definitions of each measure, while the PDF document contains the actual data. Note that some of the definitions are in terms of the number of borrowers while others are in terms of dollar loan volume or number of loans. Each data release provides lifetime default rates for five cohorts, with the most recent cohort year two years prior to the current fiscal year.

The US Department of Education has published data concerning 15-year lifetime default rates by college type for loans entering repayment in 1995. These default rates are based on loans, not borrowers or dollars. They include Stafford, Parent PLUS and Grad PLUS loans, but not Perkins loans. The categorization of colleges is based on the current participation agreements on file with PEPS. Over the years some 2-year public and non-profit colleges have shifted to 4-year designations. The following table shows some statistics concerning the 15-year cumulative lifetime default rates for FY1995.

15-Year Lifetime Default Rates for FY1995
College Type 15-Year Default Rate Percent of Defaulted Loans Percent of Loans in Repayment
Foreign 2-Year 20.7% 0.0% 0.0%
Foreign 4-Year 15.1% 0.1% 0.1%
Non-Profit 2-Year 29.3% 1.2% 0.8%
Non-Profit 4-Year 13.6% 21.4% 30.6%
For-Profit 2-Year 40.0% 16.8% 8.1%
For-Profit 4-Year 30.4% 9.0% 5.7%
Public 2-Year 31.3% 12.6% 7.8%
Public 4-Year 15.1% 32.4% 41.8%
Unknown 4-Year 5.0% 0.0% 0.0%
Consolidation Loans 25.8% 6.5% 4.9%
Overall 19.5% 100.0% 100.0%

Similar cumulative lifetime default rate data is available for the FY1997 through FY2007 cohorts, albeit for less than 15 years.

Total Defaulted Loan Volume

Recently, roughly 6% to 7% of the total federal student loan portfolio has been in default, down from around 10% in the 1990s. The following table shows the percentage of the total loan portfolio that is in default. This table shows outstanding principal balances only. It does not include accrued but unpaid interest.

Total Defaulted FFEL and Direct Loan Volume
Fiscal Year
(End)
Defaulted Outstanding Non-Defaulted Outstanding Total Portfolio % in Default
2000 $21.50 billion $202.91 billion $224.41 billion 9.6%
2001 $21.62 billion $228.43 billion $250.04 billion 8.6%
2002 $21.65 billion $258.18 billion $279.83 billion 7.7%
2003 $22.84 billion $292.35 billion $315.19 billion 7.2%
2004 $23.82 billion $328.00 billion $351.82 billion 6.8%
2005 $25.12 billion $376.46 billion $401.58 billion 6.3%
2006 $27.65 billion $413.43 billion $441.08 billion 6.3%
2007 $31.53 billion $459.93 billion $491.47 billion 6.4%
2008 $36.64 billion $511.81 billion $548.46 billion 6.7%
2009 $42.64 billion $581.73 billion $624.37 billion 6.8%

Other Flaws in the Cohort Default Rate

While the narrow window in the definition of the cohort default rate was an often criticized weakness, there are still other problems. For example, deferments and forbearances count in the denominator but not the numerator in the calculation of the cohort default rate. So a school (or lender) who is in contact with a borrower could push the default beyond the three-year window by encouraging the borrower to seek an economic hardship deferment or a forbearance. (The economic harship deferment has a three-year clock on eligibility, while forbearances have a five-year cap.) This is one of the reasons why medical schools have such low cohort default rates, because medical students routinely use the economic hardship deferment and forbearances during their internships, residencies and fellowships.

The new income-based repayment plan allows a zero monthly payment for borrowers with income under 150% of the poverty line. It effectively functions like the economic hardship deferment for the first three years for these borrowers and like a forbearance indefinitely (until the remaining debt is cancelled after 25 years in repayment).

(Note that a default on a consolidation loan is treated as though it were a default on the loans that were consolidated for the purpose of calculating the cohort default rate. So paying off federal education loans by consolidating them does not wipe the slate clean. However, consolidating does reset the clocks on deferments and forbearances.)

Students who enroll in graduate school and obtain an in-school deferment may also be counted in the denominator but not the numerator.

The cohort default rate is a short-term measure of defaults and can be influenced by factors beyond the college.s control, such as unemployment rates and changes in interest rates. A longer-term measure, on the other hand, is retrospective and does not reflect current conditions.

There are a few possible approaches toward addressing the flaws in the cohort default rate measure:

  • Calculate the percentage of loan dollars instead of the percentage of borrowers or loans that default. This would yield a better measure of the financial risk to the federal government.

  • Divide the dollar loan volume defaulting during the academic or calendar year (regardless of cohort) by the total dollar volume in repayment or the total dollar volume outstanding. This yields a measure that has some of the characteristics of both short-term and long-term default rate measures and is similar to the measures that lenders use to evaluate their own performance.

  • Switch from measuring defaults to measuring non-performing assets (or conversely, measuring performing assets). This would include deferments, forbearances and zero-payment loans in the numerator along with defaults, in addition to the denominator.

    (An alternative would exclude deferments and forbearances from the denominator in addition to the numerator, allowing only borrowers that have an opportunity to default to be included in the default rate measure. This wouldn't be as effective a measure as including them in both the numerator and the denominator because it excludes consideration of nonperforming assets entirely.)

  • Calculate the ratio of payments to principal to loan volume in repayment. This measures progress in repaying the debt and naturally factors in borrowers who are repaying the debt more slowly because of difficulty in repaying the debt (perhaps due to overborrowing). This is similar to measures that calculate performing and nonperforming assets.

  • Divide the number of borrowers who default each year by the total number of students graduating each year.

  • Use a more direct measure of institutional quality, such as the percentage of graduates who pass an independent third-party test, such as the bar for law students and the medical boards for medical school students.

  • Differentiate between default rates for at-risk students (e.g., low income students and first-generation college students) and the rest of the student population. For example, calculate separate default rate measures for Pell Grant recipients and non-recipients.

  • Use financial metrics that are better targeted at the value-add of a college education, such as measures of the return on investment to the student, to the federal government and overall. These metrics could include the cost per degree attained, education debt to income ratios, loan payback period analysis and a comparison of the change in income before and after graduation with the out-of-pocket cost of education. All of these metrics are in some way focused on comparing dollars in versus dollars out. This will address the question of whether a college education is a cost-effective use of funds.

Each of these measures could be disaggregated according to lender or educational institution to yield a measure of the performance of these entities.

There are several reports concerning these and other flaws in the cohort default rate measure:

 

 
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