Maintained for Historical Purposes

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

Federal Perkins Loan Program - Default

AwardYear: 1997-1998
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 8
SectionTitle: Default
PageNumbers: 87-100


[[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
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 reestablishes 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 the Department 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.

[[Default Reduction Assistance Project (DRAP)--"Dear Colleague"
Letter CB-94-7]]
To assist schools in bringing defaulted borrowers into repayment, the
Department has established the Default Reduction Assistance Project
(DRAP). Under DRAP, a school can request that the Department
send a borrower any of three letters designed to warn the student of
the seriousness of default. The Department 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.

[[SkipTracing and the Safeguard Activity Report--CB-96-15 (LD),
July 1996]]
Although schools are no longer required to use the IRS/ED skip-
tracing service for carrying out the due diligence provisions of the
Perkins Loan Program, the Department 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. In order to maintain eligibility to participate in
the in the IRS/ED Skiptracing Service, each school that participates
must submit an annual Safeguard Activity Report in accordance with
IRS Publication 1075. If a school fails to submit the report, it will
lose its eligibility to participate in the service. "Dear Colleague"
letter CB-96-15 (LD), dated July 1996, included instructions for
completing the report that was due by August 31, 1996. The reports
help ensure that procedures are established and utilized to safeguard
the names and addresses of defaulted borrowers under the Perkins
Loan Program. General questions should be directed to the
Department's Program Systems Service, Campus-Based Programs
Systems Division. The telephone number is (202) 708-6726.

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

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 1997-98 Fiscal Operations Report and Application to
Participate (FISAP) lists the cohort default rate that affects the school
for the 1997-98 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, 1994 and June 30, 1995. 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 (1994-95 for the
1997-98 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 1995-96 award year (June 30, 1996). For
purposes of that calculation, as of June 30, 1996, 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.

- For example, if a borrower's loan is in default for at least
240/270 consecutive days and an authorized period of
deferment begins after the 239th day past due, the loan would
be counted as a default in the school's cohort default rate even if
the loan is in a deferred status on June 30.

Once the loan is 240/270 days past due, bringing it below
240/270 days past due or even bringing it current will not
eliminate the loan from the cohort default rate. Because a
borrower is not billed during an authorized period of deferment,
the delinquency would not increase during the deferment.

[[School makes payment]]
- 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.

[[Borrower pays loan in full]]
- If a borrower pays a past-due loan in full, the loan will not be
included in the school's cohort default rate.

[[Satisfactory repayment arrangements]]
- 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.

[[Borrower with loans from multiple schools]]
- In the case of a student who has attended and borrowed at more
than one school, the student and his or her subsequent repayÐment
or default are attributed to the school where the student received
the loan that entered repayment in the award year.

[[Loan assigned to the Department]]
- A defaulted loan that has been assigned to the Department is
counted in determining a school's cohort default rate if the loan
entered repayment during the appropriate time period.
Assignments of loans to the Department no longer lower a school's
default rate. In addition, the status of a loan that has been assigned
to the Department 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.

[[Retroactive forbearance]]
- A loan that is 24 days or more past due but on which the school
has granted a retroactive forbearance (after providing the
necessary documentation to the school) is considered to be in
default only for the purpose of determining a school's cohort
default rate. The loan is not considered to be in default for the
purpose of determining the borrower's eligibility for additional
SFA funds.

RULES FOR CALCULATING THE NUMBER OF DAYS IN
DEFAULT

The following rules are used in calculating the number of days a loan
has been in default.

- The 240/270 consecutive days in default is determined by
calculating the "age" of the account (that is, the number of
consecutive days the oldest dollar is past due).

- A payment that a borrower makes on a past-due loan is applied to
the oldest dollars first, effectively reducing the past-due status.

- For example, suppose a borrower's monthly payment amount is
$50. The borrower has made no payments for 5 months, making
the loan 150 days past due. The borrower then makes one $50
payment. The school applies the payment to cover the first
month's payment that was overdue, reducing the loan's past-due
status from 150 days to 120 days because the earliest past-due
payment is now 4 months old. The calculation of the number of
days overdue begins with the oldest dollar past due.

- A loan on which a borrower is past due and on which the
borrower makes an occasional payment but never becomes current
could be counted as a defaulted loan for the cohort default rate
calculation despite the occasional payments. Because the
delinquency is not being cured, the oldest past-due dollar could
eventually become 240 days past due, making the loan count in
the cohort default rate calculation. However, if the borrower
makes enough occasional payments to prevent the oldest past-due
dollar from becoming 240 days old, the loan would not be
included in the cohort default rate calculation.

- For example, let's use the same scenario as the example above.
The borrower's oldest dollar is 120 days past due. The borrower
does not make any additional payments for 90 days, making the
oldest dollar 210 days past due. The borrower then makes a $50
payment, reducing the past-due status to 180 days. Another 60
days elapse without the borrower making a payment, bringing
the oldest dollar to 240 days past due. At that point, the loan
would be counted in the school's cohort default rate even if
subsequent payments reduce the past-due status to less than
240 days.

- An exception to the 240/270-day threshold will be granted in a
case where a borrower

1. would have qualified for a deferment for a period beginning
prior to the loan hitting the 240/270-day threshold and

2. failed to file a request for the deferment in a timely manner.

For such a borrower, the loan's past-due status would be adjusted
to reflect the deferment period beginning date. However, note that
the borrower would need to pay any past-due amounts that were
due prior to the beginning of the authorized deferment periods, if
the deferment period beginning date does not eliminate the loan's
entire delinquency.

- Using the earlier example, the oldest dollar of the loan is 240
days past due. The borrower files a request for a deferment
based on the fact that he or she is attending school and the
enrollment period began on the date that the loan became 90
days past due. The past-due status of the loan is reduced to 90
days, and the loan is given a deferment status. This loan is
treated as if the 240-day threshold had never been reached.
Therefore, it would not be counted in the school's cohort
default rate.

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 the Department
notifies the school of the rate until the Department notifies the school
that the rate no longer applies.

[[Change from branch to freestanding school]]
If a school changes status from a branch of one school to a
freestanding or independent school, the Department 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, the Department 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.

[[Branch moves to another school]]
If a school changes status from a branch of one school to a branch of
another school, the Department 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.

[[Ownership changes]]
If a school has a change in ownership that results in a change in
control, the Department 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 the Department
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 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 34 CFR 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
institutionÑreviews 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 34 CFR 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 Perkins Loan or NDSL to the
Department 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 the Department.

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

1. an assignment formÑED Form 553, provided by the Department
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]]
The Department 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 bankruptcyÑunless 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 the Department accepts the assignment of a loan, it will give the
school written notice to that effect. BY ACCEPTING THE
ASSIGNMENT, THE DEPARTMENT ACQUIRES ALL RIGHTS,
TITLE, AND INTEREST IN THE LOAN. After the Department has
accepted the assignment of the loan, the school must endorse and
forward to the Department any subsequent payment(s) the borrower
may make.

If the Department 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 Perkins Loan
Fund in the amount of the unenforceable portion of the outstanding
balance. Once the fund is reimbursed, the Department 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 the Department
that he or she has made satisfactory arrangements to repay the loan.

DEFAULT PREVENTION SOFTWARE

[[IDPS Computer software]]
The Department'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 5012
Washington, D.C. 20202

Contact: Gail Gurley
Telephone Number: 202/708-8834

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 Perkins Loan Program (a 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.

Last Modified: 07/21/1998