NAICU Washington Update

Cohort Default Rates Dip

September 29, 2014

Earlier this month, the Department of Education published institutional student loan cohort default rates (CDR) showing that the percentage of students who defaulted on a federal student loan had decreased. According to the Department, the national three-year rate for FY 2011 declined from 14.7 percent last year to 13.7 this year, but remained higher than the FY 2009 rate of 13.4 percent.

CDRs in all sectors went down, even the for-profit sector. The overall private nonprofit sector dropped from 8.2 to 7.2 percent. The rate for 4-year private nonprofit colleges declined from 8 to 7 percent (the FY 2009 percentage for nonprofits was 7.5 percent). The for-profit sector still has the highest cohort default rate at 19.1 percent. The public sector rate (2-year and 4-year institutions) is 12.9 percent. It is 8.9 percent for 4–year public colleges.

The Department attributes the reduction in default rates to many factors, most notably, better outreach to students regarding repayment options, especially the availability of income-based repayment plans, including President Obama’s pay as you earn (PAYE) plan which enables borrowers to repay their loans at no more than 10 percent of their discretionary income. Additional factors cited by the Department included increased counseling and efforts to improve the loan servicing.

This is the first year in which penalties are in effect for institutions that had 3 years of CDRs of 30 percent or more. The Department found that about 400 institutions across sectors had reached the 30 percent threshold for Title IV program elimination. Because it was a new threshold, and because the loans involved in calculating the CDRs were included in loan repayment and collection processes during the period of transition from the bank-based loans of the Federal Family Education Loan Program (FFELP) to the Department’s Direct Loan Program, the Department decided not to count certain loans where borrowers had “split servicing” of their loans.

The Department looked at those institutions that would have lost eligibility because of high defaults to see if the situation of multiple servicers per borrower was a factor. The Department determined that borrowers at these identified institutions were not considered in default if repayment of one loan was current, even if another loan, handled by a different servicer, was in default. Defaults in such cases were removed from an institution’s rate. In the end about 20 of the nearly 400 institutions, half of which were beauty/barber schools, lost eligibility for Title IV programs.

Additional resources

MORE News from NAICU