The Department of Education plans to release unofficial three-year cohort default rates (CDRs) later this year or in early 2011 as it prepares to implement provisions in the Higher Education Opportunity Act of 2008. The change from a two-year to a three-year CDR is expected to dramatically increase CDRs anywhere from 30 to 50 percent for most schools when it is implemented in 2014, according to internal test calculations performed by the Department.
Once the three-year CDR is implemented, any school with a CDR equal to or greater than 30 percent must establish a default prevention plan in accordance with Department regulations. Moreover, the first year a school’s CDR is 30 percent or more, the school must establish a Default Prevention Task Force. Noncompliance can lead to a loss of eligibility to participate in Pell, Title IV and Direct Loan programs.
Between now and 2014, the Department plans to publish unofficial three-year CDRs to help schools prepare for the stricter default standard. NASFAA and the Department are encouraging aid administrators to begin collaborating with the institution’s administration and colleagues today to ensure campuses dedicate sufficient resources to help borrowers avoid default to avoid the negative consequences of a high CDR. Failure to plan early could result in immediate Title IV sanctions or program participation limitations effective late September 2014.
There are significant internal challenges that institutions may face when trying to prevent default. While loan counseling is highly recommended, a record number of college students are applying for aid which dramatically increases a financial aid offices’ workload and decreases the availability of one-on-one counseling. A smaller institutional budget leading to less staff and fewer resources also leaves less time for counseling students. Add to this new Congressional regulations and declines in default prevention partnerships, and many schools are facing a perfect storm.
There is no silver-bullet solution to keep the CDR low. Instead, financial aid offices must help campus leaders, lawmakers, policymakers and the public fully understand all the factors that contribute to default so comprehensive and coordinated strategies can be implemented to help struggling borrowers. Student loan default is not a financial aid office issue. It is a campus-wide student success issue on which early planning can have a direct, positive effect.
Some recommended default prevention steps include:
- Remedial education to help students who are not academically prepared for college success
- Academic counseling for students with low grade-point averages
- Institutional grant aid provided to needy students to reduce borrowing and debt levels
- Financial aid counseling to ensure that students only seek loans after exhausting all eligible grant aid and work-study options, and don’t borrow a penny more than they need
- Loan entrance counseling that ensures borrowers understand all loan terms, repayment obligations and options, and the consequences of default
- Loan exit counseling to refresh borrowers as they get ready to leave school and enter repayment
- Financial literacy education to help borrowers understand budgeting, money management, and the basics of personal finance
The success of an institution is intrinsically tied to the success of its students, so financial aid administrators—and others at the school—must do everything they can to ensure borrowers have the tools they need to make prudent borrowing decisions and successfully repay their loans.
While an institution can put these prevention methods into place, there are factors out of a school’s control that present challenges.
“Issues such as high unemployment rates and family income can’t be controlled by colleges,” said NASFAA President Justin Draeger. “However, colleges and universities should embrace the concept that they can have a positive impact on student loan repayment rates by helping struggling students succeed academically; helping them set realistic expectations in terms of salary and work goals; and by counseling them on smart borrowing, repayment options and avoiding default.”
It is imperative that an institution develop and implement a plan to address loan default today in order to avoid Title IV sanctions and limitations with the onset of three-year CDRs. Remember that today’s students will be borrowers in repayment when the Department switches to the three-year default rate. Additional efforts to inform and assist these students can have a positive impact on their ability to repay their loans in the coming years.
To help keep default rates low, NASFAA and the Department of Education offer various informational tools for schools and borrowers including:
- CDR Information for Institutions (Department of Education)
- What Borrowers and Families Need to Know to Avoid Student Loan Default (NASFAA)
- Student Loan Default Facts and Repayment Tips for Struggling Borrowers (NASFAA)
Submitted by Heather Kerrigan, NASFAA Web Reporter/Editor