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Trends and Issues
Cohort default rates: Special situations
In this article, Shoptalk Online explores some of the more unusual or confusing aspects of the cohort default rate (CDR) calculation. Much of the information provided is based on ED's Cohort Default Rate Guide and Cohort Default Rate Guide Quick Reference. See the "More information" section at the end of this article to learn how to access these and many more CDR-related resources.
Keep in mind as you read that currently, the cohort default period is the two-year period that begins on October 1 of the fiscal year when the borrower enters repayment, and ends on September 30 of the following fiscal year. Beginning with rates calculated for the FY 2009 cohort, however, the cohort default period will span three years rather than two years. The benefits and sanctions associated with a school's official CDR will also change beginning with the three-year rate published in September 2014.
When is a loan in default?
The timeframe for determining whether a loan is in default differs between the FFELP and Direct Loan programs.
The holder of a FFELP loan can submit a default claim on the loan to the guarantor that guaranteed the loan when a loan becomes over 270 days delinquent. For CDR purposes, a FFELP loan is considered to be in default only if the guaranty agency has paid a default claim on the loan to the lender. The date the guaranty agency reimburses the lender for the defaulted loan is used to determine if the borrower will be included in the calculation. If the date the claim is paid on a FFELP loan is within the cohort default period, the loan is included in the numerator of the CDR.
A Direct Loan is considered in default for CDR purposes after 360, rather than 270, consecutive days of delinquency. The date the loan becomes 361 days delinquent is used to determine if the borrower will be included in the calculation. If the date the loan reaches 361 consecutive days of delinquency is in the cohort default period, the loan is included in the numerator of the CDR.
CDR calculation questions
Q.: Can the school make a payment on the borrower's behalf in order to keep the loan from affecting its CDR?
A.: No. If a school owner, agent, contractor, employee, or any other affiliated entity or individual makes a payment to prevent a borrower's default on a loan that entered repayment during the cohort fiscal year, the loan is considered in default for CDR purposes.
Q.: How do consolidation loans affect the numerator of the cohort default rate calculation?
A.: Although FFELP and Direct Consolidation Loans are not directly included in the CDR calculation, a defaulted consolidation loan may cause a borrower to be included in the numerator of the CDR calculation. This occurs if the consolidation loan defaults within the cohort default period that is applicable to the underlying loan(s).
Q.: Is there a different calculation for schools with a low numbers of borrowers entering repayment in a fiscal year?
A.: Yes. The Non-Average Rate Formula, shown below, is used for a school with 30 or more borrowers entering repayment during a cohort fiscal year.
Number of borrowers who defaulted or met other
specified condition during the three-year cohort default period
Number of borrowers who entered repayment
in the cohort fiscal year
On the other hand, the Average Rate Formula is used to calculate the official cohort default rate for a school with 29 or fewer borrowers entering repayment during a cohort fiscal year. It is used, however, only if that school had a CDR calculated for the two previous cohort fiscal years.
Number of borrowers who defaulted or met other
specified condition during the two-year cohort default
period for the cohort fiscal year in which they entered repayment
Number of borrowers who entered repayment in
the cohort fiscal year and the two preceding fiscal years
In calculating a school's draft CDR, ED always uses the non-average rate formula. Since the draft rate is based only on a school's current cohort fiscal year data, schools with 29 or fewer borrowers entering repayment cannot use the draft rate to anticipate their official cohort default rate. Instead, those schools must perform a manual calculation using the average rate formula to anticipate their official CDR.
In calculating a school's official CDR, ED uses the non-average rate formula or the average rate formula, depending on the number of borrowers entering repayment.
Sanctions and benefits
Q.: What's the difference between a sanction and a benefit?
A.: There are both sanctions and benefits associated with high and low CDRs, respectively. A sanction imposes a penalty or restriction upon a school with a CDR that exceeds a certain percentage. A benefit allows a school with a CDR below a certain percentage to be exempt from select federal cash management requirements. The sanctions and benefits described here are those currently in effect; both will be modified beginning with the three-year rate published in September 2014. Watch Shoptalk Online for future articles about the transition to a three-year rate.
Sanctions for schools with high official cohort default rates
The following sanctions apply when a school's official CDR is at or above certain percentages. If a school is notified that it is subject to sanction, the school may submit an adjustment or appeal to attempt to avoid that sanction. Adjustments and appeals are available to schools after the release of the official cohort default rates. Challenges are available to schools after the release of the draft cohort default rates.
| Affected School |
Sanctions |
| A school's three most recent official cohort default rates are 25.0 percent or greater. |
Except in the event of a successful adjustment or appeal, the school will lose FFELP, Direct Loan, and Pell grant eligibility for the remainder of the fiscal year in which the school is notified of its sanction and for the following two fiscal years. School may also be subject to provisional certification. |
| A school's current official cohort default rate is greater than 40.0 percent. |
Except in the event of a successful adjustment or appeal, the school will lose FFELP and Direct Loan program eligibility for the remainder of the fiscal year in which the school is notified of its sanction and for the following two fiscal years. School may also be subject to provisional certification. |
Note: A school is not subject to the loss of Pell grant eligibility if, prior to October 7, 1998, the school requested in writing to withdraw from or lost its eligibility to participate in the FFELP and/or Direct Loan programs and has not subsequently participated in those programs. In addition, a school is not subject to the loss of Pell grant eligibility if it did not certify any FFELP loans and/or originate any Direct Loans on or after July 7, 1998. A school that resumes participation in the FFELP or Direct Loan programs is no longer eligible for either of these Pell grant exemptions.
Benefits for schools with low official cohort default rates
There are two benefits available to a school with a low official CDR, as described in the chart below. These benefits take effect as soon as the school receives its official CDR notification letter or notification of a successful adjustment and/or appeal from ED's Portfolio Performance Division (PPD; formerly named Default Prevention and Management). Schools no longer qualify for these benefits starting 30 calendar days after receiving notice from PPD of an official CDR that exceeds the benefit threshold.
| Eligible School |
Benefits |
| A school whose most recent official CDR is less than 5.0 percent and is an eligible home institution that is certifying or originating loans to cover the cost of attendance in a study abroad program. |
May deliver or disburse loan proceeds in a single installment to a student studying abroad regardless of the length of the student's loan period.
May choose not to delay the delivery or disbursement of the first installment of loan proceeds for first-time, first-year borrowers studying abroad. |
| A school with an official CDR of less than 10.0 percent for each of the three most recent fiscal years for which data are available, including eligible home institutions and foreign institutions. |
May deliver or disburse, in a single installment, loans that are made for one semester, one trimester, one quarter, or a four-month period.
May choose not to delay the first disbursement of a loan for 30 days for first-time, first-year undergraduate borrowers. |
Q.: Are there any consequences if a school submits an adjustments and/or appeals but fails to avoid sanctions?
A.: In addition to losing eligibility, a school that submits adjustments and/or appeals but fails to avoid sanctions is liable for certain costs associated with the FFELP loans it certified and delivered and/or the Direct Loans it originated and disbursed during the adjustment and appeal process. Liabilities are not calculated for loans that were delivered or disbursed more than 45 calendar days after the school submitted its completed adjustment or appeal to ED. Schools may avoid this liability if they choose not to certify or originate loans during the adjustment and appeal process.
Q.: If a school is subject to a sanction, when does the sanction take effect?
A.: The effective date of the sanction is dependent upon whether or not the school timely submitted an adjustment or appeal, and the current sanction status of the school.
Q.: What if the school doesn't have an official CDR?
A.: An official CDR cannot be calculated for a school with 29 or fewer borrowers entering repayment during a cohort fiscal year if the school did not have an official or unofficial rate calculated for either or both of the 2 previous cohort fiscal years. Such a school will have an unofficial rate calculated using the non-average formula and current year data. Unofficial rates don't meet the statutory definition for cohort default rates and cannot be used to determine sanctions and benefits.
More information
Plan to attend TG's "Managing Your Cohort Default Rate" webinar on October 5, 2009, from 2 p.m.-3 p.m. Central Time, for more information about how a school's CDR is calculated, the transition from a two-year to a three-year calculation, as well as a discussion about TG's Integrated Default Aversion™ (IDA™) and how it can help schools to manage their CDR. Registration for this webinar is available online.
You can download the latest version of ED's Cohort Default Rate Guide at http://ifap.ed.gov/DefaultManagement/CDRGuideMaster.html. Note that updates to this publication will be reflected only at http://ifap.ed.gov/drmaterials/changelog.html. Therefore, periodic review of this site is recommended for maintaining an up-to-date version of the Guide.
TG's Default Prevention Internet Resources page offers a wide variety of CDR and default prevention resources, including the Cohort Default Rate Guide Quick Reference and other ED publications, online student loan debt management resources for borrowers, personal finance organizations, research reports, fact sheets, and more.
Watch future editions of Shoptalk Online for additional CDR-related articles.
Questions
If you have questions, please contact TG customer assistance at (800) 845-6267, or send an email message to cust.assist@tgslc.org.
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Policy potpourri
Q.: How is a school's cohort default rate (CDR) affected if a student borrower rehabilitates his or her Stafford loan(s) to bring them out of default?
A.: If the borrower rehabilitates his or her defaulted loans before the end of the cohort default period, the borrower is not included in the numerator of the CDR calculation because the borrower is no longer considered to be in default. If the borrower rehabilitates the loan after the end of the cohort default period, the borrower is considered in default for CDR purposes and is included in the numerator. The denominator remains unchanged.
Do you have a question?
Feel free to Ask TG™. Ask TG, TG's online query tool for borrowers, schools, and lenders, offers a database of frequently asked questions about financial aid, student loan processing, and TG's products and services. To submit a question, visit tgslc.custhelp.com.
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