Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Perkins Loan Program - Default

AwardYear: 1995-1996
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 8
SectionTitle: Default
PageNumbers: 87-98



[[Definition of default]]
"Default" in the Federal Perkins Loan Program is defined as "the
failure of a borrower to make an installment payment when due or to
comply with other terms of the promissory note or written
repayment agreement." Technically speaking, a loan made under the
Federal Perkins Loan Program is in default on the first day after a
payment is past due. However, schools are required to comply with
the due diligence regulations in regard to notifying the borrower
about payments due or overdue, billing procedures, and collection
procedures before resorting to litigation. Due diligence procedures
are discussed in Sections Six and Seven of this chapter.

[[Report to credit bureau]]
Schools must report a defaulted loan account to a national credit
bureau organization with which ED has an agreement; this
requirement is included in the Higher Education Amendments of
1992 and in Section 674.45 of the November 30, 1994 Final Rule. A
school must also report any change in account status to the same
national credit bureau to which it originally reported the default,
according to the reporting procedures of the credit bureau. If the
school receives an inquiry from any credit bureau about the
information reported on the loan amount, the school must respond
within one month of its receipt to the inquiry information. If the
loan is rehabilitated by the borrower (see the next page), the school
must report the rehabilitation within 30 days of the rehabilitation, to
the same national credit bureau to which it originally reported this
defaulted loan.

The debtor has the right to appeal the accuracy and validity of
information reported to the credit bureau. For more information
about reporting Federal Perkins Loans or NDSLs to a national credit
bureau, see Section Ten, "Credit Bureau Reporting."

[[Satisfactory arrangements to repay]]
A borrower who has made "satisfactory arrangements to repay" a
defaulted loan re-establishes his or her eligibility to apply for federal
student aid. However, the loan is still considered to be in default and
will continue to be reported as defaulted to a national credit bureau
organization with which ED has an agreement. "Satisfactory
arrangements to repay" is defined in the November 30 Final Rule as
the "establishment of a new written repayment agreement and the
making of one payment each month for six consecutive months." If a
borrower has made satisfactory arrangements to repay a defaulted
loan, the loan is not included in calculating the school's cohort
default rate.

[[Rehabilitation of defaulted loan]]
Section 674.5 (e) of the November 30, 1994 Final Rule provides that
a defaulted loan is considered to be "rehabilitated" after the borrower
has signed a new repayment agreement and has made one payment
each month for 12 consecutive months. Within 30 days of the
rehabilitation, the school must report the rehabilitation to the same
national credit bureau to which it originally reported this defaulted
loan. A rehabilitated loan is not included in determining a school's
cohort default rate.

[[ED's Default Reduction Assistance Project (DRAP)]]
[[Skip Tracing]]
To assist schools in bringing defaulted borrowers into repayment,
ED has established the Default Reduction Assistance Project
(DRAP), which is discussed in "Dear Colleague" letter CB-94-7,
dated June 1994. Under DRAP, a school can request that ED send a
borrower any of three letters designed to warn the student of the
seriousness of default. ED provides these services at no cost to the
school. Participation in DRAP is voluntary. General questions about
DRAP should be directed to the Campus-Based Programs Systems
Division. The telephone number is (202) 708-6726. As DRAP is
intended to get the borrower back into repayment BEFORE the
account goes to a collection firm, this service should NOT be
requested once a collection agency is involved. This service is
usually provided during the 30-day period during which a school is
awaiting response to the "final demand" letter. Although schools are
no longer required to use the IRS/ED Skip-tracing Service for
carrying out the due diligence provisions of the Federal Perkins
Loan Program, ED strongly encourages schools to continue to use
this service. The IRS/ED Skip-tracing Service is one of the most
powerful tools available to schools for locating defaulted borrowers.

COMPROMISE OF REPAYMENT OF DEFAULTED LOAN

To encourage repayment of defaulted loans, the November 30, 1994
Final Rule provides that a school may compromise on the repayment
of a defaulted loan if the school has fully complied with all due
diligence requirements discussed in Section Six of this chapter, and
if the student borrower pays in a single lump-sum payment--

- 90 percent of the outstanding principal balance on the loan;

- the interest due on the loan; and

- any collection fees due on the loan.

The federal share of the compromise repayment must bear the same
relation to the school's share of the compromise repayment as the
federal capital contribution (FCC) bears to the institution's capital
contribution (ICC).

PENALTY FOR SCHOOLS WITH HIGH COHORT DEFAULT
RATES

For award year 1994-95 and subsequent years, if a school's cohort
default rate meets the levels below, a default penalty is imposed on
the school, as described below

- If a school's cohort default rate equals or exceeds 15 percent, it
must establish a default reduction plan, as required by Section
674.5 of the November 30, 1994 Final Rule (refer to page 6-92);

- If the school's cohort default rate is greater than 15 percent, it
may not participate in the ELO;

[[Rate of 20% or more causes reduction in FCC]]
- If the school's cohort default rate equals or exceeds 20 percent,
but is less than 25 percent, the school's FCC will be reduced by
10 percent;

- If the school's cohort default rate equals or exceeds 25 percent,
but is less than 30 percent, the school's allocation or FCC will
be reduced by 30 percent;

- If the school's cohort default rate equals or exceeds 30 percent,
the school's allocation or FCC will be reduced to zero.

CALCULATING A SCHOOLÂ’S COHORT DEFAULT RATE

[[Definition of "cohort default rate"]]
A school's cohort default rate is calculated for a particular year
based on the information the school provides on the annual Fiscal
Operations Report.

The term "cohort default rate" means (for any award year in which
30 or more current and former students at the school enter
repayment on a loan received for attendance at that school) the
percentage of those current and former students who enter
repayment in that award year on the loans received for attendance at
that school and who default before the end of the following award
year.

For any award year in which LESS than 30 current and former
students at the school enter repayment on a loan received at the
school, "cohort default rate" means the percentage of those current
and former students who entered repayment on loans received for
attendance at that school in any of the THREE most recent award
years and who defaulted on those loans before the end of the award
year immediately following the year in which they entered
repayment.

[[Look at date a loan enters repayment]]
Each school's 1995-96 FISAP lists the cohort default rate that affects
the school for the 1995-96 award year. We will refer to that rate as
the school's current cohort default rate. This rate (for schools with at
least 30 borrowers entering repayment each year) was calculated by
computing the number of borrowers who entered repayment between
July 1, 1992 and June 30, 1993. For purposes of the cohort default
rate, "entering repayment" began the day after the end of the initial
grace period or the day that the borrower waived his or her initial
grace period.

[[Denominator of formula]]
The denominator in the calculation is the number of borrowers
entering repayment during the specified award year (1992-93 for the
1995-96 FISAP). Borrowers enter repayment only once during the
life of the loan. In calculating the default rate, each loan is attributed
only to the school that made the loan.

[[Numerator of formula]]
The numerator in the calculation is the number of people in the
denominator who were in default as of the end of the following
award year. In calculating a school's current cohort default rate, the
numerator is the number of people in the denominator who were in
default at the end of the 1993-94 award year (June 30, 1994). For
purposes of that calculation, as of June 30, 1994, a borrower must
have been in default for at least 240 consecutive days for monthly
payments, or 270 consecutive days for other installments. Even if
the school had paid off the loan, the borrower still had to be
included in this calculation. However, borrowers who had made
satisfactory arrangements to repay the loan could be excluded from
the numerator.

DEFAULTED LOANS TO BE INCLUDED IN A SCHOOLÂ’S
COHORT DEFAULT RATE

The criteria listed below determine which defaulted loans must be
included in the formula to determine a school's cohort default rate

- A borrower must be included in determining the school's cohort
default rate if the borrower's default has persisted for at least
240 consecutive days for a loan repayable monthly, or 270
consecutive days for a loan repayable quarterly.

- A loan is considered to still be in default if a payment is made
by the school, its owner, agency, contractor, employee, or any
other entity or individual affiliated with the school in order to
avoid default by the borrower.

- A loan that is in default, but on which the borrower has made
satisfactory arrangements to repay, or any loan that has been
rehabilitated before the end of the following award year is not
considered to be in default for the purpose of determining a
school's cohort default rate.

- In the case of a student who has attended and borrowed at more
than one school, the student and his or her subsequent
repayment or default are attributed to the school where the
student received the loan that entered repayment in the award
year.

[[Assignments do not lower cohort default rate]]
- A defaulted loan that has been assigned to ED is counted in
determining a school's cohort default rate if the loan entered
repayment during the appropriate time period. Assignments of
loans to ED no longer lower a school's default rate. In addition,
the status of a loan that has been assigned to ED is still
considered in default until the loan is paid in full, even if the
borrower has made satisfactory arrangements to repay the
defaulted loan in order to qualify for additional aid from SFA
programs.

- Loans that default as a result of improper servicing or collection
are not considered in calculating the cohort default rate.
Improper servicing or collection is defined as the school's (or its
servicing agent's) failure to comply with the due diligence
regulations.

COHORT DEFAULT RATE FOR A SCHOOL WITH MORE
THAN ONE LOACTION

If a school has a branch or branches or has an additional location or
locations, the school's cohort default rate applies to all branches and
locations of the school as they exist on the first day of the award year
for which the rate is calculated. The cohort default rate applies to all
branches/locations of the school from the date ED notifies the school
of the rate until ED notifies the school that the rate no longer
applies.

[[Rate is based on school's status on July 1]]
If a school changes status from a branch of one school to a free-
standing or independent school, ED determines the cohort default
rate based on the school's status as of July 1 of the award year for
which the rate is being calculated.

[[Cohort default rate of schools that merge]]
If an independent school becomes a branch of another school or
merges with another independent school, ED determines the cohort
default rate based on the combined number of students from both
schools who enter repayment during the applicable award year and
the combined number of students from both schools who default
during the applicable award years. The new rate applies to the new
consolidated school and all of its current locations.

[[Rate if branch moves to another school]]
If a school changes status from a branch of one school to a branch of
another school, ED determines the cohort default rate based on the
combined number of students from both schools who enter
repayment during the applicable award year and the combined
number of students from both schools who default during the
applicable award years from both schools in their entirety.

[[Rate if ownership changes]]
If a school has a change in ownership that results in a change in
control, ED determines the cohort default rate based on the
combined number of students who enter repayment during the
applicable award year and the combined number of students who
default during the applicable award years at the school under both
the old and new control.

DEFAULT REDUCTION PLAN

[[Plan is required if default rate is 15% or more]]
Section 674.6 of the November 30, 1994 Final Rule requires any
school with a cohort default rate that equals or exceeds 15 percent to
establish and implement a plan designed to reduce defaults by its
students in the future. The school must submit to ED by December
31 of the calendar year in which the cohort default rate was
calculated--

- a written description of the default reduction plan;

- a statement indicating that the school agrees to comply with the
required measures listed in the following paragraph; or

- if the school already has a default reduction plan under the
FFEL Program, a statement that the school agrees to apply that
plan to the Federal Perkins Loan Program.

[[Measures required in a default reduction plan]]
A school's default reduction plan must include the measures listed
below and a description of the measures the school will take to
reduce defaults. The school must explain how it plans to implement
the following measures:

1. Revise admission policies and screening practices, consistent
with applicable state law, to ensure that students enrolled in the
institution, especially those who are not high school graduates
or those who are in need of substantial remedial work, have a
reasonable expectation of succeeding in their programs of
study;

2. Improve the availability and effectiveness of academic
counseling and other support services to decrease withdrawal
rates, including--

- providing academic counseling and other support services to
students on a regular basis, at a time and location that is
convenient for the students involved;

- publicizing the availability of the academic counseling and
other support services;

- establishing procedures to identify academically high-risk
students and schedule those students for immediate
counseling services; and

- maintaining records identifying those students who receive
academic counseling;

3. Attempt to reduce its withdrawal rate by conforming with its
accrediting agency's standards of satisfactory progress and with
those described in 34 CFR 668.14, and improving its curricula,
facilities, materials, equipment, qualifications and size of
faculty, and other aspects of its educational program in
consultation with its academic accrediting agency;

4. Increase the frequency of reviews of in-school status of
borrowers to ensure the institution's prompt recognition of
instances in which borrowers withdraw without notice to the
institution--reviews must be conducted each month;

5. Expand its job placement program for its students by--

- increasing contacts with local employers, counseling students
in job search skills;

- exploring with local employers the feasibility of establishing
internship and cooperative education programs;

- -attempting to improve its job placement rate and licensing
examination pass rate by improving its curricula, facilities,
materials, equipment, qualifications and size of faculty, and
other aspects of its educational program in consultation with
the cognizant accrediting body; and

- establishing a liaison for job information and placement
assistance with the local office of the United States
Employment Service and the Private Industry Council
supported by the U.S. Department of Labor.

6. Remind the borrower of the importance of the repayment
obligation and of the consequences of default, and update the
institution's records regarding the borrower's employer and
employer's address as part of the contacts with the borrower
under 674.42(b);

7. Obtain from the borrower, at the time of a borrower's
admission to the institution, information regarding references
and family members beyond those provided on the loan
application, in order to provide the institution or its agent with
a variety of ways to locate a borrower who later relocates
without notifying the institution;

8. Explain to a prospective student that the student's
dissatisfaction with, or nonreceipt of, the educational services
being offered by the institution does not excuse the borrower
from repayment of any Federal Perkins Loan;

9. Use a written test and intensive additional counseling for those
borrowers who fail the test to ensure the borrower's
comprehension of the terms and conditions of the loan
including those described in 674.16 and 674.42(a) as part of
the initial loan counseling and the exit interview;

10. During the exit interview provided to a borrower--

- explain the use by institutions of outside contractors to
service and collect loans;

- provide general information on budgeting of living expenses
and other aspects of personal financial management; and

- provide guidance on the preparation of correspondence to the
borrower's institution or agent and completion of deferment
and cancellation forms;

11. Use available audio-visual materials such as videos and films
to enhance the effectiveness of the initial and exit counseling;

12. Conduct an annual comprehensive self-evaluation of its
administration of the Title IV programs to identify
institutional practices that should be modified to reduce
defaults, and then implement those modifications;

13. Delay loan disbursements to first-time borrowers for 30 days
after enrollment; and

14. Require first-time borrowers to endorse their loan check at
the institution and to pick up at the institution any loan
proceeds remaining after deduction of institutional charges.

ASSIGNMENT

Procedures for submitting assignment of defaulted Federal Perkins,
Direct, or Defense Loans were discussed in "Dear Colleague" letter
CB-94-22, dated October 1994. ED will publish updated assignment
procedures in 1995.

[[Assignment conditions]]
A school may assign a defaulted Federal Perkins Loan or NDSL to
the U.S. Department of Education if--

- the school has not been able to collect despite following due
diligence procedures, including at least a first level of collection
and litigation, if required by the regulations in effect on the date
the loan entered default;

[[Balance of $25 or more may be assigned to ED]]
- the total amount of the borrower's account to be assigned,
including outstanding principal, accrued interest, collection
costs, and late charges, is $25 or more; and

- the loan has been accelerated.

A promissory note may be assigned only during the submission
period established by ED.

A school must submit the following documents to ED for any loan it
proposes to assign:

[[Documents required for assignment]]
1. an assignment form--ED Form 553, provided by ED and
completed by the school, which must include a certification by
the school that it has complied with the due diligence
procedures discussed in Section Six of this chapter, including
at least a first level collection effort;

2. the original promissory note or a certified copy of the original
note;

3. a copy of the repayment schedule;

4. a certified copy of any judgment order entered on the loan;

5. one photocopy of completed ED Form 553;

6. a complete statement of the repayment history;

7. copies of all approved requests for deferment and cancellation;

8. a copy of the notice to the borrower of the effective date of
acceleration and the total amount due on the loan;

9. documentation that the school has withdrawn the loan from
any firm that it employed for address search, billing, collection
or litigation services, and has notified that firm to cease
collection activity on the loans;

10. copies of all pleadings filed or received by the institution on
behalf of a borrower who has filed a petition in bankruptcy
and whose loan obligation is determined to be
nondischargeable; and

11. Documentation that the institution has complied with all of
the due diligence requirements if the school has a cohort
default rate that is equal to or greater than 20 percent as of
June 30 of the second year preceding the submission period.

[[Limitations on assignment]]
ED will not accept assignment of a loan if--

- the school has not included the borrower's Social Security
number;

- the borrower has received a discharge in bankruptcy--unless
the bankruptcy court has determined that the loan obligation is
nondischargeable and has entered a judgment against the
borrower, or unless a court of competent jurisdiction has
entered judgment against the borrower on the loan after the
entry of the discharge order;

- the school has sued the borrower, unless the judgment has been
entered against the borrower and assigned to the United States;
or

- the loan has been cancelled because the borrower has died or
because the borrower has filed for, or been granted, cancellation
due to permanent and total disability.

Assignments should be mailed to:

U.S. Department of Education
Perkins Loan Assignment
Processing Center
P.O. Box 4136
Greenville, TX 75403-4136

[[School must repay Fund for unenforceable portion]]
If ED accepts the assignment of a loan, it will give the school
written notice to that effect. By ACCEPTING THE ASSIGNMENT,
ED ACQUIRES ALL RIGHTS, TITLE, AND INTEREST IN THE
LOAN. After ED has accepted the assignment of the loan, the
school must endorse and forward to ED any subsequent payment(s)
the borrower may make.

If ED later determines an assigned loan to be unenforceable because
of an act or omission on the part of the school or its agent, the
school will have to compensate the Federal Perkins Loan Fund in
the amount of the unenforceable portion of the outstanding balance.
Once the Fund is reimbursed, ED transfers all rights to the loan
back to the school.

A school must consider a borrower whose loan has been assigned to
the United States for collection to be in default on the loan for the
purpose of eligibility for assistance from SFA programs, until the
borrower provides the school with confirmation from ED that he or
she has made satisfactory arrangements to repay the loan.

DEFAULT PREVENTION SOFTWARE

[[IDPS computer software]]
ED's computer software called Institutional Default Prevention
System (IDPS) is available free of charge to schools participating in
our federal student aid programs. IDPS is a valuable tool for default
prevention and reduction. To use IDPS, a school needs an IBM-
compatible personal computer with at least 640K memory, MS-DOS
(version 2.1 or newer), a hard disk (10 Megabytes or larger), and a
printer. "Dear Colleague" letter 92-S-67, September 1992, included
a description of the software and an order sheet. Questions about
IDPS should be addressed to:

Attn: IDPS Software Distribution
U.S. Department of Education
7th and D Streets, S.W., ROB-3, Room 5366
Washington, D.C. 20202

Contact: Francis Tang
Telephone Number: (202) 708-7833

DEFAULT AND STUDENT ELIGIBILITY

The General Provisions regulations specify that, to be eligible to
receive assistance under the SFA programs, a student must not be in
default and must CERTIFY that he or she is not in default on any
SFA loan (this certification is found on the back of Part 1 of the
1995-96 Student Aid Report). However, the regulations also provide
the following exception to the above rule: a student who is in default
on a loan made under the Federal Perkins Loan Program (a Federal
Perkins, Direct, or Defense loan) is eligible to receive assistance
under an SFA program if the student is otherwise eligible and one of
the following conditions is met:

- the school that made the loan (or the Secretary, if the loan has
been assigned to ED) certifies that the student has made
satisfactory arrangements to repay that loan or

- the loan has been paid in full.

"Satisfactory arrangements to repay" is defined in the November 30,
1994 Final Rule as the "establishment of a new written repayment
agreement and the making of one payment each month for six
consecutive months."

A student who is in default but has made satisfactory arrangements
to repay the loan will receive a comment on his or her Student Aid
Report that says--

"WARNING: Our records indicate that you are in DEFAULT on a
federal student loan held by the U.S. Department of Education [or
a state guaranty agency]. Since you have made satisfactory
arrangements to repay this loan, you may be eligible to receive
additional federal student aid at this time. However, if you fail to
make scheduled payments, you will be denied future federal student
aid."

When a school has filed suit to collect a defaulted Federal Perkins
Loan or NDSL and a judgment has been rendered on the loan, the
borrower is obligated to repay only the amount of the judgment
obtained on the loan. After a judgment is satisfied on the defaulted
loan, the student would again be eligible for future awards under
these programs if all other eligibility criteria are met. However, if a
judgment is satisfied INVOLUNTARILY (such as by garnishing the
borrower's wages), a school should consider this as evidence of
unwillingness to repay and should deny further loan assistance to
the borrower.

Note that an SFA loan that is discharged in bankruptcy is not
considered to be in default for the purpose of obtaining further grant
or work assistance under the SFA programs. It is no longer a
requirement that a borrower reaffirm a loan discharged in
bankruptcy in order to be eligible to obtain additional student loans;
this is a provision of the Bankruptcy Amendments Act of 1994,
effective October 22, 1994 (refer to Section Nine of this chapter).

As stated earlier, the Federal Family Education Loan (FFEL)
regulations allow a borrower to receive a Consolidation Loan that
could include a defaulted Federal Perkins Loan on which the
borrower has made satisfactory repayment arrangements if the
defaulted loan will reenter repayment through consolidation.
(Consolidation Loans are discussed in Chapter 10). A defaulted loan
that is being repaid under a COURT ORDER would remain in
default status until paid and is not eligible for consolidation.