On March 13, 2020, President Trump declared a National Emergency that resulted in a temporary suspension of the repayment of federal direct student loans for at least 60 days. The Coronavirus Aid, Relief, and Economic Security Act extended the repayment reprieve until September 30, 2020, and was followed by additional extensions. On August 6, 2021, the U.S. Department of Education (ED) announced what they described as the “final extension” of the suspension on student loan repayment, interest, and collections to end January 31, 2022. On December 22, 2021, President Biden announced an additional 90 day extension through May 1, 2022.
This extensive suspension of federal student loan repayment has contributed to a significant decrease in student loan cohort default rates. Although cohort default rates have been trending downwards for a few years, the national, official 2018 cohort default rate of 7.3% represents a significant decrease from the official 2017 rate of 9.7%.
While this suspension has been in place, significant upheaval has occurred in the federal student loan servicing industry. In July 2021, both the Pennsylvania Higher Education Assistance Agency (PHEAA), which operates FedLoan Servicing, and Granite State Management and Resources (New Hampshire Higher Education Association Foundation Network) announced they would not be extending their federal loan servicing contracts with ED, with both contracts expiring in December 2021. PHEAA has recently agreed to extend its contract to service loans through December 2022 to allow for a smoother transition for borrowers. In September 2021, Navient announced that it would be transitioning its federal student loan servicing portfolio to Maximus. Borrowers likely have not been paying attention to their suspended student loan obligations and may have missed the news that they have a new servicer.
The lengthy suspension of student loan repayment coupled with many borrowers being assigned to a different loan servicer is creating a scenario in which student loan defaults may dramatically increase. For many institutions, this risk may be further exacerbated by a decline in student persistence related to the COVID-19 pandemic. The National Student Clearinghouse Research Center’s July 2021 report on Persistence and Retention describes an “unprecedented one-year drop of two percentage points” (p. 1) of first-time freshmen in Fall 2019 returning for their second year. Furthermore, a longitudinal study by the National Center for Education Statistics found that students who borrowed to attend college and didn’t earn their credential are significantly more likely to default than borrowers who earn an associate’s degree or bachelor’s degree.
To avoid a significant increase in future cohort default rates, institutions should develop strategies to educate and engage borrowers. This article explains how an institution’s default rate is calculated, describes the consequences of student loan default for institutions and borrowers, provides an overview of the process for an institution to challenge its default rate, and offers some tips for acting to proactively prevent default rates from increasing.
Cohort Default Rate Explained
Although borrowers are responsible for repaying their federal student loans, ED also holds institutions responsible for borrower repayment success with a metric called cohort default rate (CDR). The CDR is expressed as a percentage with the denominator of the calculation including borrowers who entered repayment during the fiscal year and the numerator including borrowers (included in the denominator) who defaulted over a three-year monitoring period.
For example, the 2020 cohort default rate calculation for institutions with 30 or more borrowers entering repayment will include the following:
2020 CDR (%) = Borrowers who defaulted from 10-1-19 to 9-30-22 / Borrowers who entered repayment from 10-1-19 to 9-30-20
The method for calculating CDRs for institutions with fewer than 30 borrowers differs in that it uses the current cohort fiscal year and the two most recent cohort fiscal years in the calculation to determine an average rate.
For the purpose of calculating CDRs, borrowers are considered to be in default if they have not made a payment for 360 calendar days.
The Consequences of Student Loan Default
Borrowers who default on their federal student loans (defined for borrowers as 270 calendar days without payment) face numerous and serious consequences. These consequences may include acceleration of the loan (the entire loan plus any accrued interest becomes due immediately), loss of deferment and forbearance options, loss of eligibility for additional federal student aid, damage to the borrower’s credit score, garnishment of wages, offsets of tax refunds and other federal payments, and potential collection and legal costs.
Institutions also face serious consequences if their official CDR exceeds certain thresholds. If an institution’s three most recent official CDRs are 30% or greater or the official CDR is 40% or greater in a single year, it loses Direct Loan and Federal Pell Grant eligibility for the remainder of the fiscal year 30 days after the institution receives notice of the CDR and for the next two fiscal years.
Institutions also gain certain benefits if they successfully manage their CDR. If an institution has an official CDR of less than 5%, it may disburse federal student loans in a single installment to a student studying abroad. If an institution has an official CDR of less than 15% for each of the three most recent fiscal years, it may disburse single installment loans for loan periods that are one semester, one trimester, one quarter, or a four-month period. Also, the institution is not subject to the 30 day first disbursement delay of a federal loan for first-time undergraduate borrowers.
Institutions receive two cohort default rates each year via the Student Aid Internet Gateway (SAIG). First, they receive a draft cohort default rate in February. The draft cohort default rate is only provided to the institution and is not shared publicly by ED. Institutions are encouraged by ED to review the data used to determine the draft cohort default rate and to enter incorrect data challenges if they identify any borrower data that was incorrectly reported, borrowers who were incorrectly included, and borrowers who were incorrectly excluded. Institutions also have the option of entering a participation rate index challenge if the institution is at risk of sanctions due to a high draft CDR, but they have a low percentage of students participating in the federal student loan programs and are seeking to avoid sanctions when the rate becomes official.
To determine if it should challenge the data used to calculate the draft CDR, an institution must review the Loan Record Detail Report (LRDR) that accompanies its draft CDR notification. The LRDR contains the data elements needed to determine that the correct students and their correct statuses are included in the CDR calculation. The LRDR contains each borrower’s name and Social Security Number, loan repayment status, last day of attendance, and the date the borrower entered repayment. This information should be compared to the information in the institution’s student information system (SIS). To make this analysis easier for institutions, ED also provides the LRDR in an extract-type format that can be imported into a spreadsheet. An institution can produce a spreadsheet from its SIS and merge the two documents to compare data and identify potential discrepancies.
If an institution receives a draft CDR and feels the rate is at an acceptably low level, it may be tempted to skip the step of reviewing the LRDR report. However, it is a good idea to review the data even if the draft rate is low because such a review can reveal patterns of error at the institution that can be used to resolve underlying issues before they become a serious problem. For example, a school could discover graduation dates aren’t being reported promptly for students who graduate off-cycle due to the late awarding of transfer credits or course substitutions. Failure to report a student’s graduation rate timely can inadvertently eliminate a student’s grace period, which can contribute to loan default. The data can also reveal that students in certain majors or with certain characteristics (independent students or part-time students, for example) are more likely to default, and that information can be used to better target default prevention efforts.
In September institutions receive their official cohort default rate and have another chance to appeal for reasons including the following:
- Uncorrected Data Adjustment – an appeal asserting ED didn’t make agreed upon changes based on an incorrect data challenge to the draft rate
- New Data Adjustment – an appeal asserting new data reported to the National Student Loan Data System changed between the draft and official rate calculations, which resulted in incorrect borrower data being used in the official CDR calculation
- Loan Servicing Appeal – an appeal asserting the borrower’s loan servicer improperly serviced the loan used in the calculation (for example, the servicer didn’t contact the borrower, didn’t skip trace the borrower, or didn’t send a final demand letter)
- Erroneous Data Appeal – an appeal asserting disputed data used in the official CDR calculation is subjecting the institution to sanctions based on official CDR
- Economically Disadvantaged Appeal – an appeal asserting the institution should not face sanctions because it serves an economically disadvantaged student population
- Participation Rate Index Appeal – an appeal asserting the institution should not lose eligibility for Title IV funding because a low percentage of students participate in the federal student loan programs
Two other categories of appeal to the official cohort default rate named the Average Rates Appeal and the Thirty-or-Fewer Borrowers Appeal are initiated by ED who notifies institutions if they qualify for these appeals.
If there are changes between the draft CDR and the official CDR, the institution should review the most recent LRDR to identify reasons for the changes, ensure the changes are accurate and enter a New Data Adjustment if an error is negatively impacting the official CDR.
Preventing Default While a Borrower is Attending
Although only institutions with a CDR of 30% or greater are required to establish a default prevention task force to create a default prevention plan that meets specific requirements, every institution should have a strategy to help borrowers avoid the serious consequences of loan default and to minimize the institution’s CDR. Institutions can deploy many tactics to reduce the risk of student loan default while a borrower is still enrolled. Of course, the best strategy for preventing student loan default is ensuring students complete their academic programs and successfully find employment. The strategies outlined below are in addition to the initiatives institutions are already deploying to improve student outcomes.
All institutions must ensure borrowers complete loan entrance counseling prior to making the first disbursement of a federal student loan. However, many institutions go beyond the federal minimum to provide ongoing and meaningful opportunities for borrowers to learn about their student loan obligations. They create educational tools such as videos, webinars, blog posts, and loan repayment calculators and regularly remind enrolled students of the availability of these resources. Some colleges purchase or develop a financial literacy curriculum and then incentivize or even require students to complete the program. If an institution completes the LRDR analysis suggested earlier in this article, it may identify categories of students who would particularly benefit from additional education on student loan borrowing and such programs can be tailored to the needs and interests of that group. For example, if an institution finds commuter students are most likely to default, educational sessions can be provided at times and locations where commuter students congregate. If an institution discovers students in a particular major are over-represented among defaulters, that information should be shared with the academic department (without violating student privacy, of course). The academic department may be open to including a financial literacy component in the program curriculum, allowing financial aid staff to visit classrooms, or offering enhanced career placement services for graduates.
In an Electronic Announcement dated November 21, 2019, ED announced that it would be introducing a process called “Informed Borrowing Confirmation” that would require student and parent borrowers to annually confirm how much they owe in federal student loans before receiving disbursements for the award year. This process was later renamed the Annual Student Loan Acknowledgement and implementation of the requirement has been delayed due to the COVID-19 pandemic. Once implemented, this process should be useful to institutions in raising borrower awareness. Although not yet mandatory, the tool is currently available at studentaid.gov and institutions can use this tool to educate borrowers as part of their default prevention efforts.
One area of caution is that although institutions can and should provide numerous opportunities for borrowers to learn about their rights and obligations as student loan borrowers, institutions cannot require additional loan counseling beyond the counseling required for first-time borrowers as a condition of receiving federal student loans. GEN-15-06 (published April 6, 2015) provides further detail on acceptable practices for student loan entrance counseling.
Exit counseling is another excellent opportunity to help borrowers understand their rights and obligations as student loan borrowers. Institutions are required to deliver exit counseling to borrowers “shortly before the student borrower ceases at least half-time study”, which applies if the institution knows the borrower is graduating or withdrawing. If the borrower doesn’t inform the institution they will be leaving, the institution has 30 days from the day it determines the borrower is no longer attending to notify the student of the requirement. Many institutions have borrowers complete the online exit counseling at studentaid.gov, which satisfies the minimum federal requirement. However, it is advisable to also offer borrowers the option of completing in-person exit counseling so they have an opportunity to ask questions of a trusted college official and discuss their personal circumstances related to repayment. A borrower who has a meaningful exit counseling experience may be more likely to reach out to the institution for help if they struggle with loan repayment.
Finally, it is essential institutions collect accurate contact information before borrowers leave. As a best practice, borrowers should be asked to regularly confirm their mailing and permanent address, phone number and email address. Some institutions have added an interface to their SIS that requires all students to confirm and re-enter contact information every semester and at the time of graduation. If an institution maintains separate applications for graduation and diploma mailing, it’s important that addresses supplied by the borrower during this process are recorded in the student system as they often reflect the borrower’s next known address.
Preventing Default Once a Borrower Leaves the Institution
It is essential to keep track of borrowers who leave the institution and attempt to assist struggling borrowers before they have defaulted. Although loan servicers also reach out to borrowers who are in their grace period and repayment, borrowers already have a relationship with their institution and may be more likely to answer calls and discuss concerns with the institution. The tone of these conversations should be friendly and should convey personal concern for the borrower.
First, it is essential to reach out to a borrower during their grace period to ask if they have questions regarding loan repayment or need assistance connecting with their loan servicer. This can also be another opportunity to ensure the institution has the correct contact information for the borrower. It is especially important to reach out to borrowers who have withdrawn, either officially or unofficially, as they are more likely to struggle with repayment. In some cases, these borrowers may be several months into their grace period before they are reported as withdrawn as they are not considered and reported as withdrawn until they don’t return for the next academic year as expected.
The next category of borrowers requiring contact are those identified as 30-60 days delinquent, which is called early-stage delinquency. Institutions can obtain a list of borrowers by cohort who are in early-stage delinquency by downloading the DELQ01 report from the National Student Loan Data System (NSLDS). This report should be run at least once a month as the data is regularly refreshed. It is not uncommon for borrowers to appear and disappear from this report multiple times, and such activity can be a sign that outreach from the institution will be helpful to the borrower. If there are too many past due borrowers to manage at this stage, institutions can also choose to target borrowers at a different threshold (for example, greater than 90 days delinquent).
Finally, an institution can use the same DELQ01 report from NSLDS to identify borrowers by cohort who are in late-stage delinquency, which is defined as 240 or more days delinquent. These borrowers are 30 or fewer days away from experiencing the serious consequences of federal loan default and 120 or fewer days away from being included as defaulters in the institution’s CDR. A potential strategy for this group would be advising them of the very serious personal consequences of default and that even at this late stage, they have options available to avoid to consequences of default.
The ability of an institution to perform these outreach activities is dependent on available resources and the volume of borrowers who need to be contacted at each stage. One approach to such a resource challenge is to prioritize contact with the borrowers who are most at risk of default. Typically, these are borrowers who didn’t finish their academic program and those who enter late-state delinquency. If an institution completes the LRDR analysis suggested earlier in this article, it may identify other categories of students who might benefit from outreach while in repayment. Some institutions choose to outsource default prevention activities to allow staff to focus on currently enrolled students. If an institution decides to outsource this function, it must list the selected vendor as a third-party servicer on the E-App.
If you have questions, contact Financial Aid and Higher Education Specialist Cynthia Grunden at Cynthia.Grunden@PowersLaw.com.