| AwardYear: 1998-1999 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 10 SectionTitle: Default Reduction Measures PageNumbers: 93-108 The U.S. Department of Education issued comprehensive default reduction regulations on June 5, 1989, as part of a major effort to reduce the default rate of Federal Stafford Loan and Federal Supplemental Loans for Students (SLS) borrowers. The regulations are found in the General Provisions regulations (Part 668) and in the Federal Family Education Loan Program (FFEL) Program regulations (Part 682). Schools with high FFEL Program cohort default rates are a major focus of the default reduction regulations and of subsequent legislation focusing on the problem of defaulted loans. These actions by law and regulation require schools to provide students with additional loan counseling and to take specific steps to reduce loan defaults. Questions about the default reduction initiatives that are not answered in this chapter may be directed to U.S. Department of Education Default Management Division Portals Building, Room 6300 600 Independence Avenue, SW Washington, DC 20202-5353 Phone: 202/708-9396 or 202/708-6048 LOANS INCLUDED IN A SCHOOL'S COHORT DEFAULT RATES -------------------------------------------------------- Most default reduction measures are based on a school's cohort default rate for a given fiscal year. The fiscal year (FY) for the federal government is October 1 through September 30. Thus FY 1998 is the period October 1, 1997 through September 30, 1998. In past years, the data used to calculate cohort default rates included only FFELs. Beginning with the calculation of FY 1995 cohort default rates, however, loans borrowed under the William D. Ford Federal Direct Loan Program (Direct Loans) have also been included. Subsidized and unsubsidized Stafford Loans, subsidized and unsubsidized Direct Loans, and Federal Supplemental Loans for Students (SLS) are included in a school's cohort default rate calculation. Federal PLUS Loans and Direct PLUS Loans are not included in calculating a school's cohort default rate. For information on how Federal Consolidation Loans and Direct Consolidation Loans are counted in cohort default rates, see the FY 1995 Official Cohort Default Rate Guide. [[Loan is considered in repayment]] For the purpose of calculating cohort default rates, a Stafford Loan or a Direct Stafford Loan is considered to have entered repayment on the day or month following six months of an uninterrupted initial grace period. An SLS loan is considered to have entered repayment on the day after a student drops below half-time enrollment. There is once exception: If a student has both an SLS loan and a Stafford Loan that were obtained during the same enrollment period, the SLS loan is considered to have entered repayment on the same day as the Stafford Loan. [[Loan is considered in default]] For the purpose of calculating cohort default rates under FFEL, a loan is considered in default on the date that the Department or guaranty agency pays the default claim. For the purpose of calculating cohort default rates under Direct Loans, a loan is considered to be in default on the 271st day of a borrower's delinquency for all types of schools (public; private nonprofit; proprietary degree-granting schools; and proprietary, non- degree-granting schools). For proprietary, non-degree-granting schools, a Direct Loan is also considered to be in default on the 271st day that a borrower's scheduled payments under the Income Contingent Repayment Plan have been less than $15 per month and less than the monthly interest accruing on the loan. CALCULATING COHORT DEFAULT RATES ------------------------------------- The cohort default rate is the percentage of current and former students who entered repayment on a Federal Stafford (subsidized or unsubsidized) or Federal SLS loan in a given fiscal year and who defaulted before the end of the following fiscal year. The cohort default rate is a combined rate for both Stafford Loans and SLS loans. However, a borrower who enters repayment on more than one of these loans during the fiscal year in question is counted only once in computing the school's default rate for that year. Schools with 30 or More Borrowers The formula for calculating a cohort default rate for schools with 30 or more borrowers entering repayment is: the number of students who both entered repayment in FY A and defaulted by the end of FY B (the following FY) ------------------------------------------------------------------ the total number of students who entered repayment in FY A [[34 CFR 668.17(e)(1)(ii)]] The above calculation (for 30 or more borrowers entering repayment) is used for public, private nonprofit, and proprietary degree-granting institutions. For proprietary non-degree-granting institutions, the above calculation is used, but that calculation will also include the number of borrowers who meet all of the following criteria: - entered repayment in FY A and - before the end of FY B (the following FY) have been in repayment for 270 days on a Direct Loan under the income- contingent repayment plan with scheduled payments that are less than $15 per month and - those payments result in negative amortization. (The same alternative can be used for proprietary non-degree- granting institutions for any fiscal year in which fewer than 30 students enter repayment.) The following is an example of how the cohort default rate for a school with 30 or more borrowers in repayment is determined: In FY 1995, 80 current and former SLS loan and/or Stafford Loan borrowers at Sturdy Community College entered repayment on their loans. By the end of FY 1996, 20 of those students, or one fourth, had defaulted. Thus, the school's FY 1995 cohort default rate is 25%. Schools with Fewer than 30 Borrowers [[Average cohort default rate]] For a school with fewer than 30 students entering repayment during the fiscal year, the percentage of current and former students who entered repayment on Stafford Loans or SLS loans in ANY of the three most recent fiscal years and who defaulted before the end of the following fiscal year will be used as that school's cohort default rate. This means that the number of students who enter repayment in any (or all) of the three most recent fiscal years (in this case, FY 1993, FY 1994, and FY 1995) are added together, and the number of students who default before the end of the following fiscal year in any of those years will be added together. Then, as with the cohort default rate for schools with 30 or more borrowers, the number of students in default divided by the number who entered repayment times 100% results in a percentage of students in default--which is the official cohort default rate for the school. Previously, the default rate for each of the three most recent fiscal years was averaged to arrive at the official cohort default rate. Note that average cohort rates calculated under that formula (for fiscal years prior to FY 1991) are not recalculated under the new formula. More information on calculating cohort default rates for schools with fewer than 30 borrowers is included in the FY 1995 Official Cohort Default Rate Guide accompanying each school's official cohort default rate notification letter. Following is an illustration of how the calculation for a school with fewer than 30 borrowers is made: Chehak Institute had 15 borrowers who entered repayment in FY 1993; of those 15, 10 defaulted by the end of FY 1994. The school had 25 borrowers entering repayment in FY 1994; of those 25, 5 defaulted by the end of FY 1995. Chehak then had 20 borrowers entering repayment in FY 1995; of those 20, 5 defaulted by the end of FY 1996. Chehak's FY 1995 cohort default rate is calculated as follows: FY 1993 FY 1994 FY 1995 10 + 5 + 5 = 20 -------------------------------------------------- 15 + 25 + 20 = 60 Thus, Chehak's FY 1995 default rate is 20 / 60 x 100% = 33.3%. Schools in Both FFEL and Direct Loans [[Dual-program cohort rate--34 CFR Section 668.17]] If a school makes both FFELs and Direct Loans, the Department will calculate a rate that includes both types of loans, if applicable. Because a school's FY 1995 cohort default rate is based on the loans that entered repayment during FY 1995, a school that participates in both programs might have an FY 1995 cohort default rate based on only one program. The Department now calculates the following types of rates: - FFEL cohort default rate - Direct Loans cohort rate - dual-program cohort rate (also known as weighted-average cohort rate Tarlek College participates in both FFEL and Direct Loans. Seventy-three former students who received FFELs through the school entered repayment between October 1, 1994 and September 30, 1995, but no Direct Loan borrowers from the school entered repayment during that period. Tarlek College's FY 1995 cohort default rate is based on the 73 borrowers who entered repayment during FY 1995. Thus, the school's FY 1995 cohort default rate is based only on FFELs. If borrowers from both programs through Tarlek College had entered repayment during FY 1995, the school's cohort default rate would be based on both FFELs and Direct Loans. [[Unduplicated borrower count]] A borrower may enter repayment on both a FFEL and a Direct Loan in a given fiscal year. In this situation, the school's weighted-average cohort rate is determined by comparing the number of both FFEL and Direct Loan borrowers who enter repayment in a fiscal year against those borrowers who default before the end of the following fiscal year. Each borrower and each default is counted only once-- even if a borrower has both FFELs and Direct Loans entering repayment in a given fiscal year. CHANGES OCCURRING AFTER AN OFFICIAL COHORT DEFAULT RATE CALCULATION ---------------------------------------------------------------------------- A cohort default rate is like a snapshot of the time period affected. Changes that occur after the data for a particular cohort default rate are collected will not affect that default rate calculation. To illustrate, let's look at Sturdy Community College's FY 1995 cohort default rate. Those students who enter repayment in FY 1995 and default before the end of FY 1996 are counted in Sturdy's FY 1995 cohort default rate. On the following page are examples of three students who attended Sturdy and who subsequently defaulted. Jan defaulted in July 1996 but made satisfactory arrangements to repay her loan and began payments under those arrangements in December 1996. For purposes of calculating Sturdy's FY 1995 cohort default rate, Jan continues to be counted as in default. Don entered repayment in October 1994 and subsequently defaulted in May 1996. However, he won $10,000 in a lottery in November 1996 and promptly repaid his loan in full. Nevertheless, Don will continue to be counted as in default in Sturdy's FY 1995 cohort default rate calculation. Jay made payments on a loan that entered repayment in FY 1995. However, in the spring of 1996 Jay lost his job and, failing to apply for a deferment, defaulted on his loan in November 1996. Because Jay's default occurred after the FY 1995 cohort default rate calculation period ended (after September 30, 1996), his loan was reported as being in repayment only. Jay's loan is not counted as a default in any fiscal year's cohort default rate calculation. DRAFT COHORT DEFAULT RATES ------------------------------ The Department calculates draft cohort default rates before it calculates and publishes official school cohort default rates. The Department's calculating draft rates gives schools a reasonable opportunity to review and correct errors in the repayment and default information that guaranty agencies must provide to the Department for the purpose of calculating a schools' cohort default rates. The Department issued regulations published April 29, 1994 and November 29, 1994 governing the draft cohort default rate review process. Further information on the draft default rate review process is provided to schools in a booklet titled FY 1995 Draft Cohort Default Rate Review Guide, which is mailed to schools with their draft default rate notification letters. [[Review and correction]] Each school participating in the FFEL Program has the opportunity to review and correct draft cohort default rate data before official cohort default rates are calculated. (The Department is providing the same opportunity to schools participating in Direct Loans.) [[School finds inconsistencies]] [[Adjustment requests]] If a school finds inconsistencies between its records and the draft data, it must submit a challenge to the relevant guaranty agency or Direct Loan Servicing Center within 30 calendar days of receiving the data. If the guaranty agency or Direct Loan Servicing Center agrees with the school's allegations of error, the agency will submit data corrections to the National Student Loan Data System (NSLDS). If these changes are not reflected in the school's official backup data, the school may request that the Department adjust its official cohort default rate. The school must send its adjustment request within ten working days after it receives its official cohort default rate. See the FY 1995 Official Cohort Default Rate Guide for more information on adjustment requests. A school that does not challenge the data during the draft data review process may not challenge that same data at any other time. The Department will not release draft cohort default rate information to the public, nor will it use draft cohort default rates to determine a school's program eligibility or to assess penalties. For additional information on the draft data review process, see the FY 1995 Draft Cohort Default Rate Review Guide. CHANGE IN STATUS OF A SCHOOL -------------------------------- Default reduction measures apply to all divisions and locations of a school. If a school changes its status (by branching, consolidating, or changing ownership, for example) the Department will track and impose appropriate consequences for cohort default rates for fiscal years both before and after the change in status. If a location becomes a free-standing school: A school that is a location of a proprietary vocational or vocational postsecondary school and that is seeking institutional eligibility in its own right, is required to operate independently from its former "parent" school for at least two years before it is eligible to participate in SFA Programs. If a school changes ownership: If the new owner applies for eligibility to participate in the SFA Programs as a continuation of the old school, the new owner remains responsible for the school's cohort default rates and for implementing any requirements associated with those rates. New owners should be aware that cohort default rates calculated for fiscal years prior to the change of ownership may affect the school's ability to participate in SFA Programs. In fact, a school undergoing a change of ownership may be refused certification for participation in any SFA Program or may be granted provisional certification on the basis of current cohort default rates. The Department is required by law to use procedures that prevent a school from evading the application of a cohort default rate determination through such measures as branching, consolidation, change of ownership or control, or other similar device. Specific information on how cohort default rates for prior fiscal years are used for eligibility determinations following a change in status for a school was not available at the time this Handbook went to print. The Department will issue further guidance on this topic in the form of Dear Colleague Letters. When issued, this up-to-date information will also be available on the SFA BBS. Financial aid administrators with any questions regarding their schools' official cohort default rates should contact the Default Management Division at the address and phone numbers listed at the beginning of this section. Questions regarding a school's change in ownership should be directed to the Initial Participation Branch of the Department at 202/260-3270. CONSEQUENCES ASSOCIATED WITH HIGH OFFICIAL COHORT DEFAULT RATES ------------------------------------------------------------------------ In the past, if a school's cohort default rate exceeded 20%, the school was required to implement a default management plan to reduce its rate of borrower default. The school had to provide a proposed default management plan to the Department and the guaranty agency that guaranteed the largest volume of loans to its borrowers. The school was required to either adopt its own plan or notify the Department that it adopted Appendix D of Part 668 of the General Provisions regulations. However, effective July 1, 1996, a default management plan is no longer required. Schools with cohort default rates of 20% to 24.9% are not subject to sanctions and may be eligible to appeal their cohort default rates only based on the grounds of improper loan servicing and collection. This type of appeal is described on page 10-103. For all types of appeals, strict appeal time frames and standards must be met. More comprehensive information is provided in the cohort default rate notification letter and the FY 1995 Official Cohort Default Rate Guide. Regulatory provisions on appeal procedures and time frames are stated in the December 1, 1995 Student Assistance General Provisions Final Rule. Cohort Default Rates of 25% or Greater for FY 1993, FY 1994, and FY 1995 If a school's cohort default rates are 25% or greater for the three most recent fiscal years for which data are available, the school loses its eligibility to participate in the FFEL Program 30 calendar days after the date the institution receives notification from the Department of this rate. [[Loss of program eligibility]] Please note that a school can lose its eligibility for the Direct Loan Program based on FFEL cohort default rates. A school subject to loss of FFEL or Direct Loans eligibility may be eligible to appeal this action; the appeal process is described on pages 10-102 through 10- 105. Loss of eligibility remains in effect for the remainder of the fiscal year in which the school was notified of the loss plus the following two fiscal years. Thus, if the Department notified a school that it lost eligibility in FY 1998, the earliest it could reapply for eligibility to participate in the FFEL or Direct Loan Program is October 1, 2000, the first day of FY 2001. A school that loses eligibility must immediately inform all current and potential students of its ineligibility and must make clear to students that they cannot receive FFELs or Direct Loans for attendance at the school. Students attending the school remain eligible for in-school deferments. [[Exemptions]] Please note that historically black colleges and universities (HBCUs), tribally controlled community colleges, and Navajo community colleges are not subject to loss of FFEL Program eligibility due to default rates greater than 25% for the three most recent fiscal years for which data are available. This exemption has been extended to July 1, 1998. If a school loses FFEL Program eligibility, any FFEL proceeds disbursed to the school but not delivered to a borrower (or credited to the student's account) must be returned to the lender immediately. If a school loses its eligibility during a payment period but continues to provide instruction to students enrolled in its formerly eligible program, a student who, at the time of the school's loss of eligibility, has received a first disbursement of a Stafford Loan may receive the second (or subsequent) disbursement, as long as he or she is otherwise eligible. This provision assumes that the school remains open during the period of enrollment for which the loan was made. [[Appeal rights]] Schools in this category may be eligible to appeal based on any of the three types of appeals described on pages 10-102 to 10-105 (erroneous data, improper loan servicing and collection, or exceptional mitigating circumstances) in order to remain eligible to participate in the FFEL Program and/or Direct Loans. Strict appeal time frames and standards must be met, as explained on those pages. More comprehensive information is provided in the cohort default rate notification letter and the FY 1995 Official Cohort Default Rate Guide. If a school is in this default rate category, the school's financial aid administrator should read both of these documents carefully; they will provide additional information about what steps a school in this category should take. The school must retain the default rate notification letter for program review and audit purposes. Cohort default rates that exceed 40% Limitation, suspension, or termination (LS&T) is possible if a school has a cohort default rate over 40% for FY 1995. LS&T action affects a school's participation in all SFA programs. An LS&T action will not be initiated if the institution can prove that the cohort default rate is not final and that the correct rate would be less than 40%. APPEAL PROCEDURES -------------------- The right to appeal and the type of appeal that a school may submit varies depending upon the school's default-rate category. The school will remain eligible to participate in the FFEL and/or Direct Loan Programs during the appeals process. It is critical for schools to follow the appeal time frames and standards set forth in the December 1, 1995 Student Assistance General Provisions Final Rule and the FY 1995 Official Cohort Default Rate Guide. If the school does not correctly follow these procedures and time lines, the appeal will not be reviewed. The Department's appeal decisions are final. As indicated previously, schools with official cohort default rates of 20% or greater that are not subject to sanctions may appeal only on the grounds of improper loan servicing and collection. Schools subject to loss of FFEL and/or Direct Loan Program eligibility (those schools with cohort default rates of 25% or greater for the three most recent fiscal years) may appeal based on any of these three circumstances: erroneous data, improper loan servicing and collection, or exceptional mitigating circumstances. For further details concerning appeal procedures, please refer to the FY 1995 Official Cohort Default Rate Guide. - Erroneous data A school may appeal by challenging the accuracy of the default rates if it believes that a recalculation of the data would produce a rate less than 25% for any of the three relevant fiscal years. [[Erroneous data appeal process]] The school must submit its written request for verification of error to the appropriate guaranty agency (or agencies) within 10 working days of the date the school receives its default rate notification letter. The school must provide a copy of the request to the Secretary at the same time it submits the request to the guaranty agency (or agencies). The guaranty agency (or agencies) must respond within 15 working days. The school must submit its erroneous data appeal to the Department within five working days of receiving the final response from the guaranty agency (or agencies). - Improper loan servicing and collection: A school may be eligible to appeal its cohort default rate and loss of eligibility, if applicable, based on allegations of improper loan servicing and collection. The Department has developed regulations governing procedures for this type of appeal. These regulations were published as a Student Assistance General Provisions Final Rule on November 29, 1994. An institution's allegation that a lender or servicer did not conduct its loan servicing and collection responsibilities properly will be considered if - the borrower did not make a payment on the loan and - if the institution can show that the lender or servicer failed to perform one or more of the four activities listed below. [[34 CFR 668.17(h)(viii)]] These four activities include - sending at least one letter, other than the final demand letter, urging the borrower or endorser to make payments on the loan; - making at least one attempt to reach the borrower or endorser by phone; - requesting preclaims assistance from the guaranty agency, if required; and - sending the final demand letter. [[Improper loan servicing and collection appeal procedures]] To begin the appeal process, a school must submit copies of the relevant backup data to the appropriate guaranty agency (or agencies) and request loan servicing records within 10 working days after the date the school receives the Department's notification. The school must send a courtesy copy of every request for loan servicing records to the Department. The school will then receive a sample of loan servicing and collection records from the guaranty agency (or agencies). If the school is subject to loss of FFEL and/or Direct Loans eligibility, the guaranty agency (or agencies) must respond to the school's request for the sample records within 15 working days. Otherwise, the guaranty agency (or agencies) must respond to the school within 30 working days. After receiving this information from the guaranty agency (or agencies), the school has 30 calendar days to file its appeal with the Department. - Exceptional mitigating circumstances: A school may appeal under one exceptional mitigating circumstance. There are different mitigating circumstances appeal standards for degree-granting schools and non-degree-granting schools. A school must send its mitigating circumstances appeal to the Department within 30 calendar days of receiving notification of its loss of eligibility. The appeal must include a statement from an independent auditor verifying that the information provided in the appeal is complete and accurate. The school or independent auditor must send this opinion to the Department within 60 calendar days following the school's receipt of notification of its loss of eligibility. For more information on exceptional mitigating circumstances appeals, see the FY 1995 Official Cohort Default Rate Guide . The exceptional mitigating circumstances are: - The school is serving students from disadvantaged economic backgrounds and meets the required completion or placement rate. The school must meet the following requirements: [[Economically disadvantaged and completion rates criteria]] - at least 70% of its students enrolled at least half time are from disadvantaged economic backgrounds, for a 12-month period that has ended during the 6 months immediately preceding the fiscal year "for which the cohort of borrowers used to calculate the institution's rate is determined;" Note that "disadvantaged" is defined as an Expected Family Contribution (EFC) of 0 for the award year coinciding with the same 12-month period just described, or is defined as an adjusted gross income (AGI) of the student and the student's parents or spouse, if applicable, that is less than the poverty level as determined by the U.S. Department of Health and Human Services. - at least 70% of a degree-granting school's students who were initially enrolled as full time and who were scheduled to complete their programs within the same 12-month period described previously, do complete their programs, transfer to higher level educational programs, or remain enrolled and are making satisfactory academic progress at the end of the 12- month period; or [[Economically disadvantaged and placement criteria]] - a non-degree-granting school had a placement rate of 50% or more with respect to its former regular students who remained in the program beyond the point the students would have received a 100% tuition refund from the institution. This rate is based on the number of students initially enrolled at least half time who were scheduled to complete their program within the same 12-month period the school has chosen to determine the percentage of students that come from disadvantaged economic backgrounds. [[Participation rate index]] - The other mitigating circumstance serving as a grounds for appeal is that the school has a participation rate index of 0.0375 or less. This index is determined by multiplying the school's FFEL Program cohort default rate, Direct Loan Program cohort rate or weighted average cohort rate by the percentage of the school's regular students, as defined in 34 CFR 600.2, enrolled on at least a half-time basis who received a loan made under either the FFEL Program or the Direct Loan Program for a 12- month period that has ended during the six months immediately preceding the fiscal year for which the cohort of borrowers used to calculate the school's rate is determined. Institutions with cohort default rates above 40% may not appeal loss of eligibility on this basis. All three types of appeals must be sent to the Default Management Division at the address listed on page 10-93. Questions concerning a school's cohort default rate and its consequences should be directed to the Default Management Division at the address and telephone number listed on that page. [[The appeal decision is final]] The Department issues a decision on an institution's appeal within 45 calendar days after submission of the complete appeal. The appeal determination is final. The Department's regulations do not provide for further administrative review. GENERAL REQUIREMENTS TO REDUCE DEFAULT ------------------------------------------- The following requirements are applicable to all schools: - All schools (except foreign schools) wishing to participate in the FFEL Program must develop a default-management plan for the Department's approval as part of the initial application for participation; all schools must implement the plan for two years after they become eligible. Recertification will be required of all schools every five years; a default-management plan is a requirement of the Program Participation Agreement for schools wishing to participate in FFEL Programs. - A school that admits students who do not have a high school diplomas or their equivalents must make available to those students a General Education Development (GED) program. The school does not have to develop its own GED program or pay students' tuition for such a program, but the school must be sure that a GED program is available nearby and must inform students of GED program availability. This requirement applies to all SFA programs except State Student Incentive Grant (SSIG) and Byrd Scholarship programs. See Chapter 3 for more details on GED requirements. [[Disbursement requirements]] - For Stafford Loans and PLUS Loans, proceeds must be disbursed in two or more installments, regardless of the amount of the loan or the length of the enrollment period for which the loan is made. No disbursement may exceed half of the loan amount. See Section 3 of this chapter for more on this requirement. - Late disbursements of Stafford and PLUS Loans are subject to certain restrictions. See Section 3, for more information. - A Stafford Loan borrower who is entering the first year of an undergraduate program--and who has not previously received a Stafford Loan--may not receive the first installment of loan proceeds until 30 days after the first day of the program of study. If the first-time undergraduate borrower's FFEL loan is disbursed by EFT or by master check, a school may not request the disbursement of the borrower's loan proceeds until the 24th day of the student's period of enrollment. - A school is required to provide to the appropriate lender--on behalf of each student borrower--a disbursement schedule that meets Stafford Loan and PLUS Loan disbursement requirements. See Section 3. - Each school participating in SFA Programs is required to have a fair and equitable refund policy. Unless a school's refund policy is more stringent, the school must at least provide students with pro rata refunds if the students are attending the school for the first time and do not complete 60% of the period of enrollment for which the students have been charged. Pro rata refund calculations are explained in Chapter 3. |