| AwardYear: 1996-1997 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs SectionNumber: 9 SectionTitle: Default Reduction Measures PageNumbers: 97-112 The major default reduction measures, with the exception of those concerning entrance counseling, are covered in this section. The requirements for initial counseling of students will be covered in Section 10, "Entrance Counseling." Some requirements, such as modification to deferment provisions and changes to student and institutional eligibility requirements, are covered in specific sections of this chapter. Margin notes flag new information. 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 SLS borrowers. The regulations are found in the General Provisions regulations (Part 668) and in the 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. More stringent default-reduction efforts are required of schools with default rates above a given level. The Higher Education Amendments of 1992 made changes in the definition and applicability of the cohort default rate. The Amendments also initiated mandatory loan rehabilitation and a loan forgiveness program and added other measures to help borrowers avoid default. In addition, the 1993 Technical Amendments to the HEA require the annual publication of a cohort default rate for lenders, guaranty agencies, and schools. Measures enacted to facilitate the exchange of information between lenders, guaranty agencies, and schools help in locating borrowers once borrowers leave school; keeping borrowers in touch with the lender is an effective means of avoiding delinquency and default. Questions about the default reduction initiatives that are not answered in this chapter may be directed to U.S. Department of Education Default Management Section Room 3082, ROB-3 600 Independence Ave. SW Washington, DC 20202-5353 Phone: 202-708-9396 Most default-reduction measures are based on a schools cohort default rate for a given fiscal year. The fiscal year (FY) for the federal government is October 1 through September 30. Thus FY 1995 is the period October 1, 1994 through September 30, 1995. DRAFT COHORT DEFAULT RATES In the past, schools were notified of their cohort default rates annually. As of October 1, 1994, however, the Department now calculates draft cohort default rates before it calculates and publishes OFFICIAL school cohort default rates. Schools now have a reasonable opportunity to review and correct errors in the repayment and default information that guaranty agencies must provide to the Department. 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 1994 Cohort Default Rate Pre-Publication Review Booklet, which is mailed to schools with their draft cohort default rate notification letters. OFFICIAL COHORT DEFAULT RATES [[Definition of cohort default rate]] As of July 1, 1994, the cohort default rate (formerly known as the fiscal year 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 the Stafford Loan and SLS programs. 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 schools default rate for that year. 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 1994, 80 current and former SLS and/or Stafford Loan borrowers at Magenta Sands Community College entered repayment on their loans. By the end of FY 1995, 20 of those students, or one fourth, had defaulted. Magenta Sands Community Colleges FY 1994 cohort default rate is 25%. [[Calculating a cohort default rate]] The formula for calculating a cohort default rate for schools with 30 OR MORE borrowers entering repayment is: number of students who entered repayment in FY A who default by the end of FY B (the following FY) ---------------------------------------------------- x 100% number of students who entered repayment in FY A [[Calculation for schools with fewer than 30 students entering repayment]] The Higher Education Amendments of 1992 changed the formula for calculating a cohort default rate for FFEL participant schools with fewer than 30 borrowers. Beginning with the calculation of the FY 1991 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 a Stafford or SLS loan in ANY of the three most recent fiscal years and who defaulted before the end of the following year will be used as that schools 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 1992, FY 1993, and FY 1994) 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 FOR FISCAL YEARS PRIOR TO FY 1991 DO NOT CHANGE. More information on calculating cohort default rates for schools with fewer than 30 borrowers will be included in the FY 1994 Official Cohort Default Rate Guide accompanying each schools official cohort default rate notification letter. Schools with fewer than 30 borrowers entering repayment in FY 1994 that had NO data reported by guaranty agencies for one or more of the three most recent fiscal years (FY 1992, FY 1993, or FY 1994) will not have an average rate calculated for FY 1994. Following is an illustration of how the calculation for a school with fewer than 30 borrowers is made: Carolla Institute had 15 borrowers who entered repayment in FY 1992; of those 15, 10 defaulted by the end of FY 1993. Carolla had 25 borrowers entering repayment in FY 1993; of those 25, 5 defaulted by the end of FY 1994. Carolla had 20 borrowers entering repayment in FY 1994; of those 20, 5 defaulted by the end of FY 1995. Carollas FY 1994 cohort default rate is calculated as follows: [[The calculation on page 10-100 is currently unavailable for viewing. Please reference your paper handbook for additional information.]] Thus, Carollas FY 1994 default rate is 33.3%. 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, lets look at Magenta Sands Community Colleges FY 1994 cohort default rate. Those students who enter repayment in FY 1994 and default before the end of FY 1995 are counted in Magentas FY 1994 cohort default rate. Here are examples of three students who attended Magenta and who subsequently defaulted: - Alfonia defaulted in July 1995 but made satisfactory arrangements to repay her loan and reentered repayment in December 1995. For purposes of calculating Magentas FY 1994 cohort default rate, Alfonia continues to be counted as in default. - Toby entered repayment in October 1993 and subsequently defaulted in May 1995. However, Toby won $10,000 in a lottery in November 1995 and promptly repaid his loan in full. Nevertheless, Toby will continue to be counted as in default in Magentas FY 1994 cohort default rate calculation. - Jay made satisfactory payments on a loan that entered repayment in FY 1994. However, in the spring of 1995 Jay lost his job and, unable to find another job, defaulted on his loan in November 1995. Because Jays default occurred after the FY 1994 cohort default rate calculation period ended (after September 30, 1995), his loan was reported as being in repayment only. Jays loan is not counted as a default in ANY fiscal years cohort default rate calculation. Change in status of a school Default reduction measures apply to ALL divisions and locations of a school. When a school changes its status--by branching, consolidating, or changing ownership, for example--the schools cohort default rate will be reviewed based on its new status. Under the Higher Education Amendments of 1992, a school that changes its status must submit a default management plan to the Department and implement the plan for two years after its change in status. The following examples illustrate how the calculation of a schools default rate is affected by a change in the schools status. If a school has had either its FY 1992, FY 1993, or FY 1994 default rate revised due to a recalculation of a default rate or substituted due to a change in the schools status, the revised or substituted data are used to calculate an average default rate for the school. Please read the discussion that follows regarding how cohort default rates can be affected by a schools change in status. Treatment of cohort default rates for schools that change status Summaries are provided on the following pages for each type of status change. These changes affect the calculation of both the draft and the official cohort default rates for each school. For more detailed information, you may wish to consult the FY 1994 Official Cohort Default Rate Guide which is sent to each school along with the official cohort default rate notification letter. - IF A SCHOOL CHANGES FROM ONE LOCATION (BRANCH) OF A SCHOOL TO A FREE-STANDING SCHOOL: Effective January 29, 1993, new eligibility regulations (34 CFR 600.5 and 600.6) require a school that was formerly a branch of another proprietary, postsecondary vocational, or vocational school and that is seeking institutional eligibility in its own right, to operate independently from its former "parent" school for at least two years before it is eligible to participate in SFA Programs. - IF A FREE-STANDING SCHOOL BECOMES A SEPARATE LOCATION (BRANCH) OF ANOTHER SCHOOL: The Department will calculate an official cohort default rate for the school by adding cohort default rate data (borrower repayment and default data) for the former free-standing school and for the new "parent" school in order to arrive at a cohort default rate for both the former free-standing and the "parent" school. The new rate is the schools official cohort default rate and will apply to the parent school AND ALL OF ITS LOCATIONS. Remember that a free-standing school that has been issued an individual OPE/ID number MUST use that identification number when certifying FFEL application forms. The OPE/ID number provides the guaranty agencies with the means to report individual loan activity on a school-by-school basis. See Dear Colleague letter 92-S-66 (February 1992) for more information about this requirement. Here is an example of how an official default rate is calculated when a free-standing school becomes a separate location of another school. [[The example on page 10-102 is currently unavailable for viewing. Please reference your paper handbook for additional information.]] - IF A SCHOOL CHANGES FROM A LOCATION (BRANCH) OF ONE SCHOOL TO A LOCATION OF ANOTHER SCHOOL: Borrower repayment and default data will be combined as described on the previous page for free-standing to branch campus changes, but the data used will be from both schools in their entirety, not just the branches involved in the status change. The schools former "parent" repayment and default data and its new "parent" repayment and default data will be added together and used to calculate a revised official default rate for the new "parent" school AND FOR ALL OF ITS BRANCHES. - IF TWO OR MORE FREE-STANDING SCHOOLS MERGE: The cohort default rate is calculated by combining the number of students who enter repayment and the number of students who default for all of the schools, and then by calculating an official cohort default rate for the "new" merged school on that basis. - 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 schools 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 schools 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. Financial aid administrators with any questions regarding their schools official cohort default rates should contact the Default Management Section at the address and phone number listed at the beginning of this section. Questions regarding a schools change in ownership should be directed to the Institutional Participation Division of the Department at 202-708-4906. The default reduction measures required of schools with specific rates is addressed next. Consequences Associated with Official Cohort Default Rates Above Certain Thresholds In the past, if a schools 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, these procedures are no longer required. Schools in this category may appeal their cohort default rates based on the grounds of improper loan servicing and collection; this type of appeal is described on pages 10-106 to 10-107. 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 1994 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. FFEL Program cohort default rates of 25% or greater for FY 1992, FY 1993, and FY 1994 If a schools 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 Secretary of this rate; this is explained in the December 1, 1995 Student Assistance General Provisions Final Rule. Please note that schools can lose their eligibility for the Direct Loan Program based on FFEL cohort default rates. Schools subject to loss of FFEL or Direct Loan Program eligibility may appeal this action; the appeal process is described in the following section. Loss of eligibility to participate in the FFEL Program remains in effect for the following two fiscal years. Thus, the earliest that a school could reapply for eligibility to participate in the FFEL Programs is October 1, 1998, the first day of FY 1999. A school that loses eligibility must immediately inform all current and potential students of its ineligibility to participate in the FFEL Program, and must make clear to students that students cannot receive FFELs or Direct Loans for attendance at the school. Students attending the school remain eligible for in-school deferments. 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 the student (or credited to the students 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 schools 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. Schools in this category may appeal their cohort default rates based on any of the three types of appeals described on pages 10-106 to 10- 109 (erroneous data, improper loan servicing and collection, or exceptional mitigating circumstances) in order to remain eligible to participate in the FFEL Program and the Direct Loan Program. 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 1994 Official Cohort Default Rate Guide. Therefore, if a school is in this default rate category, the schools 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 default rate notification letter must be retained for program review and audit purposes. Cohort default rates that exceed 40% Limitation, suspension, or termination (LS&T) is possible if schools have cohort default rates over 40% for FY 1994. LST action affects a schools participation in ALL SFA programs. A school has only one defense against an LS&T action based on a cohort default rate above the threshold: that the rate is not final. As stated in the December 1, 1995 Student Assistance General Provisions Final Rule in section 668.90 of the regulations, 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 FOR SCHOOLS WITH HIGH OFFICIAL COHORT DEFAULT RATES The right to appeal and the type of appeal that may be submitted by a school varies depending upon its default-rate category. 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 1994 Official Cohort Default Rate Guide. If the procedures are not followed correctly by the school, it will then be prohibited from challenging its default rate. As indicated previously, schools with official cohort default rates of 20% or greater may appeal only on the grounds of improper loan servicing and collection. Schools subject to loss of FFEL 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 information sent as part of a schools default rate notification letter. - 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. The school must notify the Department in writing of its intent to appeal its loss of eligibility based on inaccurate default rates within seven calendar days from the date the school receives its default rate notification letter in order to remain eligible to participate in the FFEL Programs during the appeal process. The schools written request identifying the inaccurate data must be submitted to the appropriate guaranty agency (or agencies) within 10 working days of the date the school receives its default rate notification letter. The guaranty agency must respond within 15 days. The school must submit its final appeal to the Department within five working days of receipt of all of the guaranty agencies responses. - IMPROPER LOAN SERVICING AND COLLECTION: A school may appeal its loss of eligibility based on allegations of improper loan servicing. 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 institutions allegation stating that a lender or servicer did not conduct its loan servicing and collection responsibilities properly will be considered if a) the borrower did not make a payment on the loan and b) if the institution can show that the agency missed one of the four activities listed below. Changes to default rate data will be made only when each error is confirmed by the guaranty agency and approved by the Department. The four activities that lenders must complete as part of normal loan servicing and collection functions are as follows: - send at least one letter, other than the final demand letter, urging the borrower or endorser to make payments on the loan; - make at least one attempt to reach the borrower by phone; - request preclaims assistance from the guaranty agency, if required; and - send the final demand letter. To begin the appeal process, the institution must notify the guaranty agency and the Department of its intent to appeal within 10 working days of the date the institution received the Secretarys notification. The school will then receive a sample of loan servicing and collection records from the guaranty agency. If the institution is subject to loss of FFEL eligibility, the guaranty agency must respond to the institutions request for the sample records within 15 working days. Otherwise, the guaranty agency has 30 working days in which to respond. After receiving this information from the guaranty agency (or agencies), the institution has 30 calendar days to file its appeal with the Secretary. An institution may file an appeal of a particular fiscal years cohort default rate on the grounds of improper loan servicing and collection only once. The Secretarys determination of the outcome of the schools appeal is binding. - EXCEPTIONAL MITIGATING CIRCUMSTANCES: A school may appeal under one (or both) of the exceptional mitigating circumstances that the Department recognizes would make its loss of eligibility inequitable; these are listed below. The school must notify the Department in writing of its intent to appeal its loss of eligibility due to exceptional mitigating circumstances within seven calendar days from the date the school receives its default rate notification letter in order to remain eligible to participate in the FFEL Programs during the appeal process. If a school fails to meet the seven-day deadline, it may still appeal its loss of eligibility if a complete appeal is submitted within 30 calendar days of receipt of notification as described above. However, the school will NOT remain eligible during the appeal process. [[NEW]] As stated in the December 1, 1995 Student Assistance General Provisions Final Rule, the appeal must also include a statement from an independent auditor verifying that the information provided in the appeal is complete and accurate. This opinion must be received by the Secretary within 60 calendar days following notification to the institution concerning its loss of eligibility. As explained in the same Final Rule cited above, the exceptional mitigating circumstances are: - The school is successfully serving students from disadvantaged economic backgrounds. This means that the school must meet the following requirements: [[NEW]] + 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 institutions rate is determined;" (Please note that "disadvantaged" is defined as an EFC of 0 for the award year coinciding with the same 12-month period just described, or is defined as an adjusted gross income of the student and the students parents or spouse, if applicable, that is less than the poverty level as determined by the U.S. Department of Health and Human Services.) + for a degree-granting institution, at least 70% of its students initially enrolled as full time who were scheduled to complete within the same 12-month period described previously, do complete their program; and [[NEW]] + for a non-degree-granting institution, the institution 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 institution has chosen to determine the percentage of students that come from disadvantaged economic backgrounds." [[NEW]] - As explained in the December 1, 1995 Student Assistance General Provisions Final Rule, 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 institutions FFEL Program cohort default rate, Direct Loan Program cohort rate or weighted average cohort rate, by the percentage of the institutions 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 institutions rate is determined." (Please note that Direct Loan Program cohort default rates and weighted average cohort default rates will not be calculated until FY 1995.) Institutions subject to LS&T (those with a cohort default rate above 40%) may not appeal loss of eligibility on this basis. Please note that appeals of loss of eligibility due to a schools default rate should be sent to the Default Management Section at the address listed on page 10-98. Questions concerning a schools cohort default rate and its consequences should be directed to the Default Management Section at the address and telephone number listed on that page. The Secretary issues a decision on an institutions appeal within 45 calendar days after submission of the complete appeal. This time frame is stated in the December 1, 1995 Student Assistance General Provisions Final Rule. GENERAL REQUIREMENTS TO REDUCE DEFAULTS Consumer disclosure requirements The default-reduction regulations require schools that make marketing claims regarding job placement to provide completion and job-placement rates to prospective students. In addition, schools that advertise job-placement rates to inform prospective students of state licensing requirements of the state in which the school is located for any programs the school offers that require state licensing. All schools must provide current and prospective students with information on costs of attendance, programs offered, and the schools refund policy. If a school makes marketing claims regarding job placement in order to recruit students, the school must provide the most recent available data concerning employment statistics, graduation statistics, and other information necessary to substantiate the truthfulness of its claims. Schools with correspondence programs are required to provide current and prospective students: course work and due dates for lessons; the date by which resident training must begin; the location of residential training; and the period of time within which the training must be completed. Schools must provide current and prospective students with the completion and graduation rates of full-time undergraduate students enrolled in certificate or degree programs at the school. The student is counted as having completed or graduated if, within 150% of the time normally required for completion of the program, he or she has completed the program, graduated, or enrolled in a program for which the current program provided substantial preparation. Schools may exclude from their calculations the completion or graduation rate of students who leave school to serve in the armed forces, to serve on official church missions, or to enter a recognized foreign aid service of the federal government. Chapter 3 provides more information on this requirement. Default-reduction initiatives The following requirements are applicable to all schools: - Under the Higher Education Amendments of 1992, ALL schools (except foreign schools) wishing to participate in FFEL Programs must develop a default-management plan for approval by the Department 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 diploma or its equivalent 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 nearby and must inform students of GED program availability. This requirement applies to all SFA programs except SSIG and Byrd Scholarship programs. See Chapter 3 for more details on GED requirements. - For Stafford 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 8, "Requirements for Disbursement," for more on this requirement. - Late disbursements of Stafford Loans are subject to certain restrictions. See Section 8, "Late Disbursement," for more information on this requirement. - Stafford Loan borrowers who are entering the first year of an undergraduate program--and who have 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 borrowers FFEL loan is disbursed by EFT or by master check, a school may not request the disbursement of the borrowers loan proceeds until the 24th day of the students period of enrollment. - Schools are required to provide to the appropriate lender--on behalf of each student borrower--a disbursement schedule that meets Stafford and PLUS Loan disbursement requirements. See Section 8, "Requirements for Disbursement." - All schools participating in SFA Programs are required to have a fair and equitable refund policy. Unless the schools policy is more stringent, schools 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. |