ED Provides First Look at New Default Rates

December 18, 2009

Cohort default rates are soon headed up for all institutions, not due to the economy or the quality of education but because the definition has changed. The Department of Education recently provided institutions with a preview of what their cohort default rates would have been for FY05, FY06, and FY07 under the new calculation, and then released the data for all institutions participating in the Federal Family Education Loan program and the Federal Direct Loan program publicly on December 14.

Historically, ED has calculated cohort default rates for the Federal Family Education Loan program and the Direct Loan program by looking at how many loans that entered repayment in a given year were in default by the end of the following year (a two-year period). Concerned that default issues were being masked by the short time period covered, Congress changed the definition in the Higher Education Opportunity Act of 2008. Now, a three-year rate will be calculated looking at loans in default at the end of the second year after entering repayment.

The change will come gradually as ED accumulates cohorts with three years of data beginning with loans entering repayment in FY09, and defaulting before the end of 2011. ED will not take action based on the new three-year cohort default rates until it has three three-year rates available in 2014. The slide below, taken from a presentation at a recent ED conference, illustrates this progression.

Overall, the three-year rates were about 75 percent higher than the two-year rates, although increases were not spread evenly across various sectors of institutions. Proprietary schools rates increased most sharply (92 percent), while rates for public four-year colleges and universities increased by 64 percent. The lowest increase was at public two-year colleges at 62 percent.

Under the new rules, institutions with cohort default rates above 30 percent (up from 25 percent) will risk losing the right to participate in federal student aid programs. Institutions will need cohort default rates of 15 percent or less (up from 10 percent) to qualify for waivers of the requirements for delayed disbursement of loans to some students and multiple disbursements of single-term loans. Regulations detailing how cohort default rates will be calculated were issued last October.

2-Year vs 3-Year Cohort Default Rate