Maintained for Historical Purposes

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

Federal Perkins Loan Program - Default

AwardYear: 1996-97
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 8
SectionTitle: Default
PageNumbers: 85-96



[[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." 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 6 and 7 of this chapter.

[[Report to credit bureau]]
A school must report a defaulted loan account to a national credit
bureau organization with which the U.S. Department of Education
(ED) has an agreement. 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, the school must
respond to the inquiry within one month of its receipt.

The debtor has the right to appeal the accuracy and validity of
information reported to the credit bureau. For more information
about reporting Perkins Loans or National Direct Student Loans
(NDSLs) to a national credit bureau, see Section 10, "Credit Bureau
Reporting."

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. The term
"satisfactory arrangements to repay" is defined 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 prior to the
end of the cohort period and if the loan entered repayment during the
cohort period, the loan is not included as a defaulted loan in
calculating the school's cohort default rate.

[[ED's Default Reduction Assistance Project (DRAP)--Dear
Colleague letter CB-94-7, June 1994]]
[[Skip Tracing]]
To assist schools in bringing defaulted borrowers into repayment, ED
has established the Default Reduction Assistance Project (DRAP).
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. DRAP 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, 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 6 of this chapter
and if the borrower pays in a single lump-sum payment

- 90% 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 Institutional 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 following levels, a default penalty is imposed
on the school, as described below:

- If a school's cohort default rate equals or exceeds 15%, it must
establish a default reduction plan;

- If the school's cohort default rate is greater than 15%, it may not
participate in the Expanded Lending Option (ELO);

- If the school's cohort default rate equals or exceeds 20% but is
less than 25%, the school's FCC will be reduced by 10%;

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

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

CALCULATING A SCHOOL'S COHORT DEFAULT RATE

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

[[Definition of "cohort default rate"]]
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.

Each school's 1996-97 Fiscal Operations Report and Application to
Participate (FISAP) lists the cohort default rate that affects the school
for the 1996-97 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, 1993 and June 30, 1994. For purposes of the cohort default
rate, a loan enters repayment only once in its life. This repayment
begins the day after the end of the initial grace period or the day that
the borrower waives 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 (1993-94 for the
1996-97 FISAP). 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 1994-95 award year (June 30, 1995). For
purposes of that calculation, as of June 30, 1995, 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 INCLUDED IN A SCHOOL'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.*1* This borrower must be
included regardless of the loan's status on June 30 of the second
year of the cohort period.

- A loan is considered to still be in default if the school, its owner,
agency, contractor, employee, or any other entity or individual
affiliated with the school makes a payment to prevent the
borrower from defaulting.

- A loan that is in default but on which the borrower has made
satisfactory repayment arrangements 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.

- 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 Student Financial
Assistance (SFA) programs.

COHORT DEFAULT RATE FOR A SCHOOL WITH MORE
THAN ONE LOCATION

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.

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

Any school with a cohort default rate that equals or exceeds 15%
must 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 Federal
Family Education Loan (FFEL) Program, a statement that the
school agrees to apply that plan to the Federal Perkins Loan
Program.

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

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 34CFR 668.34 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
34CFR 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 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 checks 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 Perkins, NDSLs,
or Defense Loans were discussed in Dear Colleague letter CB-95-13,
dated June 1995 with a correction page provided in Dear Colleague
letter CB-95-22, dated September 1995.

[[Assignment conditions]]
A school may assign a defaulted Federal Perkins Loan or NDSL to
ED if

- the school has not been able to collect despite having followed
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;

- 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.

[[Documents required for assignment]]
A school must submit the following documents to ED for any loan it
proposes to assign:

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 Sections 6 and 7 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% 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 and assigned to the United States; or

- the loan has been canceled 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

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

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 1996-97 Free Application for Federal Student Aid
(FAFSA). Prior to the 1996-97 award year, the certification was on
the Student Aid Report (SAR). However, the regulations also
provide an exception to the above rule. A student who is in default
on a loan made under the Federal Perkins Loan Program (a Federal
Perkins Loan, NDSL, or Defense loan) is eligible to receive
assistance under an SFA program if the student is otherwise eligible
and he or she:

- repays the loan in full or

- makes arrangements that are satisfactory to the holder of the loan
to repay the loan balance and makes at least six consecutive
monthly payments on time under these arrangements.

The term "satisfactory arrangements to repay" is defined 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 SAR 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."

[[Willingness to repay]]
When a school has filed suit to collect a defaulted 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
is again 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.

[[Bankruptcy]]
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 change
is a result of the Bankruptcy Amendments Act of 1994, effective
October 22, 1994. (Refer to Section 9 of this chapter.)

[[Loan consolidation]]
As stated earlier, the FFEL and Direct Loan Program regulations
allow a borrower to receive a Consolidation Loan that could include
a defaulted Perkins Loan. See Section 7 for more information. A
defaulted loan that is being repaid under a COURT ORDER would
remain in default status until paid and is not eligible for
consolidation.


*1* Once the loan is 240/270 days delinquent, bringing the defaulted
loan to less than 240/270 days delinquent or even bringing it current
will not eliminate the loan from the cohort default rate.