Maintained for Historical Purposes

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

Federal Family Education Loan Program - Default Reduction Measures

AwardYear: 1997-1998
EnterChapterNo: 10
EnterChapterTitle: Federal Family Education Loan Program
SectionNumber: 10
SectionTitle: Default Reduction Measures
PageNumbers: 95-110


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
Supplemental Loans for Students (SLS) borrowers. The regulations
are found in the General Provisions regulations (Part 668) and in the
Federal Family Education Loan Program (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 certain level.

Questions about the default reduction initiatives that are not
answered in this chapter may be directed to

U.S. Department of Education
Default Management Division
Portals Building, Room 6211
600 Independence Avenue, SW
Washington, DC 20202-5353

Phone: 202/708-9396


LOANS INCLUDED IN A SCHOOL'S COHORT DEFAULT
RATES

Most default reduction measures are based on a school's cohort
default rate for a given fiscal year. The fiscal year (FY) for the
federal government is October 1 through September 30. Thus FY
1997 is the period October 1, 1996 through September 30, 1997.

In past years, the data used to calculate cohort default rates included
only FFELs. Beginning with the calculation of FY 1995 cohort
default rates, however, loans borrowed under the William D. Ford
Federal Direct Loan Program (Direct Loans) have also been
included.

Subsidized and unsubsidized Stafford Loans, subsidized and
unsubsidized Direct Loans, and Federal Supplemental Loans for
Students (SLS) are included in a school's cohort default rate
calculation.

Federal PLUS Loans, Direct PLUS Loans, Federal Consolidation
Loans, and Direct Consolidation Loans are not included in
calculating a school's cohort default rate.

For the purpose of calculating cohort default rates, a Stafford Loan
or a Direct Stafford Loan is considered to have entered repayment on
the day or month following six months of an uninterrupted initial
grace period.

An SLS loan is considered to have entered repayment on the day
after a student drops below half-time enrollment. There is once
exception: If a student has both an SLS loan and a Stafford Loan that
were obtained during the same enrollment period, the SLS loan is
considered to have entered repayment on the same day as the
Stafford Loan.

For the purpose of calculating cohort default rates under FFEL, a
loan is considered in default on the date that the Department or
guaranty agency pays the default claim.

For the purpose of calculating cohort default rates under Direct
Loans, a loan is considered to be in default on the 271st day of a
borrower's delinquency for all types of schools (public; private
nonprofit; proprietary degree-granting schools; and proprietary, non-
degree-granting schools). For proprietary, non-degree-granting
schools, a Direct Loan is also considered to be in default on the 271st
day that a borrower's scheduled payments under the Income
Contingent Repayment Plan have been less than $15 per month and
less than the monthly interest accruing on the loan.

CALCULATING COHORT DEFAULT RATES

As of July 1, 1994, the cohort 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 Stafford Loans
and SLS loans. 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 school's default rate for that year.

Schools with 30 or More Borrowers

The formula for calculating a cohort default rate for schools with 30
or more borrowers entering repayment is:

the number of students who both entered repayment in FY A
and defaulted by the end of FY B (the following FY)
-------------------------------------------------------------
the total number of students who entered repayment in FY A

The above calculation (for 30 or more borrowers entering
repayment) is used for public, private nonprofit, and proprietary
degree-granting institutions. For proprietary non-degree-granting
institutions, the above calculation is used, but that calculation will
also include the number of borrowers who meet all of the following
criteria:

- entered repayment in FY A AND

- before the end of FY B (the following FY) have been in
repayment for 270 days on a Direct Loan under the income-
contingent repayment plan with scheduled payments that are less
than $15 per month AND

- those payments result in negative amortization.

(The same alternative can be used for proprietary non-degree-
granting institutions for any fiscal year in which FEWER than 30
students enter repayment.)

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 1995, 80 current and former SLS loan and/or Stafford Loan
borrowers at Sturdy Community College entered repayment on
their loans. By the end of FY 1996, 20 of those students, or one
fourth, had defaulted. Thus, the school's FY 1995 cohort default
rate is 25%.

Schools with Fewer than 30 Borrowers

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 Stafford Loans or SLS loans in ANY of the
three most recent fiscal years and who defaulted before the end of
the following fiscal year will be used as that school's 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
1993, FY 1994, and FY 1995) 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 UNDER
THAT FORMULA (FOR FISCAL YEARS PRIOR TO FY 1991)
ARE NOT RECALCULATED UNDER THE NEW FORMULA.
More information on calculating cohort default rates for schools with
fewer than 30 borrowers will be included in the FY 1995 Official
Cohort Default Rate Guide accompanying each school's official
cohort default rate notification letter.

A school with fewer than 30 borrowers entering repayment in FY
1995 that had NO data reported by guaranty agencies for one or
more of the three most recent fiscal years (FY 1993, FY 1994, or FY
1995) will not have an average rate calculated for FY 1995.

Following is an illustration of how the calculation for a school with
fewer than 30 borrowers is made:

[[The illustration of how the calculation for a school with fewer than
30 borrowers is made on page 10-98 is currently unavailable for
viewing. Please reference your paper document for additional information.]]

Schools in Both FFEL and Direct Loans

[[Dual program rate--34 CFR Section 668.17]]
If a school makes both FFELs and Direct Loans, the Department will
calculate a rate that includes both types of loans, if applicable.
Because a school's FY 1995 cohort default rate is based on the loans
that entered repayment during FY 1994, a school that participates in
both programs might have an FY 1995 cohort default rate based on
only one program.

The Department now calculates the following types of rates:

- FFEL cohort default rate

- Direct Loans cohort default rate

- dual-program cohort default rate (also known as weighted-average
cohort default rate)

Tarlek College participates in both FFEL and Direct Loans.
Seventy-three former students who received FFELs through the
school entered repayment between October 1, 1994 and
September 30, 1995, but no Direct Loan borrowers from the
school entered repayment during that period. Tarlek College's FY
1995 cohort default rate is based on the 73 borrowers who entered
repayment during FY 1995. Thus, the school's FY 1995 cohort
default rate is based only on FFELs. If borrowers from both
programs through Tarlek College had entered repayment during
FY 1995, the school's cohort default rate would be based on both
FFELs and Direct Loans.

A borrower may enter repayment on both a FFEL and a Direct Loan
in a given fiscal year. In this situation, the school's weighted average
cohort default rate is determined by comparing the number of both
FFEL and Direct Loan borrowers who enter repayment in a fiscal
year against those borrowers who default before the end of the
following fiscal year. Each borrower and each default is counted
only once--even if a borrower has both FFELs and Direct Loans
entering repayment in a given fiscal year.

CHANGES OCCURRING AFTER AN OFFICIAL COHORT
DEFAULT RATE CALCULATION

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,
let's look at Sturdy Community College's FY 1995 cohort default
rate. Those students who enter repayment in FY 1995 and default
before the end of FY 1996 are counted in Sturdy's FY 1995 cohort
default rate. On the next page are examples of three students who
attended Sturdy and who subsequently defaulted.

Jan defaulted in July 1996 but made satisfactory arrangements to
repay her loan and began payments under those arrangements in
December 1996. For purposes of calculating Sturdy's FY 1995
cohort default rate, Jan continues to be counted as in default.

Don entered repayment in October 1994 and subsequently
defaulted in May 1996. However, he won $10,000 in a lottery in
November 1996 and promptly repaid his loan in full. Nevertheless,
Don will continue to be counted as in default in Sturdy's FY 1995
cohort default rate calculation.

Jay made payments on a loan that entered repayment in FY 1995.
However, in the spring of 1996 Jay lost his job and, failing to
apply for a deferment, defaulted on his loan in November 1996.
Because Jay's default occurred after the FY 1995 cohort default
rate calculation period ended (after September 30, 1996), his loan
was reported as being in repayment only. Jay's loan is not counted
as a default in any fiscal year's cohort default rate calculation.

DRAFT COHORT DEFAULT RATES

The Department calculates draft cohort default rates before it
calculates and publishes OFFICIAL school cohort default rates. The
Department's calculating draft rates gives schools a reasonable
opportunity to review and correct errors in the repayment and default
information that guaranty agencies must provide to the Department
for the purpose of calculating a schools' cohort default rates.

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 1995 Cohort Default
Rate Review Guide, which is mailed to schools with their draft
cohort default rate notification letters.

[[Review and correction]]
Each school participating in the FFEL Program has the opportunity
to review and correct draft cohort default rate data before official
cohort default rates are calculated. (The Department is providing the
same opportunity to schools participating in Direct Loans.)

[[School finds inconsistencies]]
If a school finds inconsistencies between its records and the draft
data, it must submit a challenge to the relevant guaranty agency or
Direct Loan Servicing Center within 30 calendar days of receiving
the data. If the guaranty agency or Direct Loan Servicing Center
agrees with the school's allegations of error, the agency will submit
data corrections to the National Student Loan Data System (NSLDS).

A school that does not challenge the data during the draft data review
process may not challenge that same data at any other time.

The Department will not release draft cohort default rate information
to the public, nor will it use draft cohort default rates to determine a
school's program eligibility or to assess penalties. For additional
information on the draft data review process, see the FY 1995 Draft
Cohort Default Rate Review Guide.

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 school's
cohort default rate will be reviewed based on its new status. 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.

For example, if a school has had its FY 1993, FY 1994, or FY 1995
default rate revised due to a recalculation of a default rate or has had
one of those rates substituted due to a change in the school's status,
the revised or substituted data are used to calculate an average
default rate for the school.

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 1995 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:

A school that was formerly a branch of another proprietary
vocational or vocational postsecondary school and that is seeking
institutional eligibility in its own right, is required to operate
independently from its former "parent" school for at least two years
before it is eligible to participate in SFA Programs. The cohort
default rates from the former parent school are applied to the newly
independent free-standing school.

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
school's official cohort default rate and will apply to the parent
school AND ALL OF ITS LOCATIONS.

[[Using OPE/ID number --"Dear Colleague" Letter 92-S-66
(February 1992)]]
Remember that a free-standing school that has been issued an
individual Office of Postsecondary Education identification
(OPE/ID) number MUST use that identification number when
certifying FFEL application forms. The OPE/ID number provides a
guaranty agency with the means to report individual loan activity on
a school-by-school basis.

Here is an example of how an official default rate is calculated when
a free-standing school becomes a separate location of another school.

Marlowe Technical School, a free-standing school, has become a
branch of Caravella Technical Institute. Here is how Caravella's new
cohort default rate will be calculated:

[[The example calculation on page 10-102 is currently unavailable
for viewing. Please reference your paper document 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.
The school's 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 school's 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 school's 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 Division at the address and phone number listed at the
beginning of this section. Questions regarding a school's change in
ownership should be directed to the Institutional Participation
Division of the Department at 202/260-3270.

CONSEQUENCES ASSOCIATED WITH HIGH OFFICIAL
COHORT DEFAULT RATES

In the past, if a school's 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, a default
management plan is 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 1995 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 1993,
FY 1994, and FY 1995

If a school's 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 Department of
this rate.

Please note that a school can lose its eligibility for the Direct Loan
Program based on FFEL cohort default rates. A school subject to loss
of FFEL or Direct Loans eligibility may appeal this action; the
appeal process is described on pages 10-105 through 10-108. Loss of
eligibility remains in effect for the following two fiscal years. Thus,
the earliest that a school could reapply for eligibility to participate in
the FFEL Program (or Direct Loans) is October 1, 1999, the first day
of FY 2000. A school that loses eligibility must immediately inform
all current and potential students of its ineligibility and must make
clear to students that they cannot receive FFELs or Direct Loans for
attendance at the school. Students attending the school remain
eligible for in-school deferments.

[[Exemptions]]
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 a borrower (or credited to
the student's 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 school's 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 10-105 to 10-
108 (erroneous data, improper loan servicing and collection, or
exceptional mitigating circumstances) in order to remain eligible to
participate in the FFEL Program and/or Direct Loans. 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 1995 Official Cohort Default Rate
Guide. If a school is in this default rate category, the school's
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 school must retain the
default rate notification letter for program review and audit purposes.

Cohort default rates that exceed 40%

Limitation, suspension, or termination (LS&T) is possible if a school
has a cohort default rate over 40% for FY 1995. LS&T action affects
a school's participation in ALL SFA programs. 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

The right to appeal and the type of appeal that a school may submit
varies depending upon the school's 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 1995 Official Cohort Default Rate Guide. If
the school does not correctly follow these procedures and time lines,
the appeal will be rejected.

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 school's 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 submit its written request identifying the
inaccurate data to the appropriate guaranty agency (or agencies)
within 10 working days of the date the school receives its default
rate notification letter. The school must provide a copy of the
request to the Secretary at the same time it submits the request to
the guaranty agency. 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 institution's allegation that a lender or servicer did not conduct
its loan servicing and collection responsibilities properly will be
considered if

- the borrower did not make a payment on the loan AND

- 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.

These four activities include

- sending at least one letter, other than the final demand letter,
urging the borrower or endorser to make payments on the loan;

- making at least one attempt to reach the borrower by phone;

- requesting preclaims assistance from the guaranty agency, if
required; and

- sending the final demand letter.

To begin the appeal process, a school must notify the guaranty
agency and the Department of its intent to appeal within 10
working days after the date the school receives the Department's
notification. The school will then receive a sample of loan
servicing and collection records from the guaranty agency. If the
school is subject to loss of FFEL eligibility (or Direct Loans
eligibility), the guaranty agency must respond to the school's
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 school has 30 calendar days to file its appeal with
the Department.

An institution may file an appeal of a particular fiscal year's cohort
default rate on the grounds of improper loan servicing and
collection only once. The Department's determination of the
outcome of the school's appeal is binding.

- EXCEPTIONAL MITIGATING CIRCUMSTANCES:

A school may appeal under one exceptional mitigating
circumstances. There are different mitigating circumstances appeal
standards for degree-granting schools and non-degree-granting
schools. See the Official Cohort Default Rate Guide for details. A
school must complete mitigating circumstances appeals within 30
calendar days of receiving notification of the end of participation.
The school will remain eligible during the appeals process.

The appeal must include a statement from an independent auditor
verifying that the information provided in the appeal is complete
and accurate. The Department must receive this opinion within 60
calendar days following the school's receipt of notification of its
loss of eligibility.

The exceptional mitigating circumstances are:

- The school is successfully serving students from disadvantaged
economic backgrounds. The school must meet the following
requirements:

- 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 institution's rate is determined;"

Note that "disadvantaged" is defined as an Expected Family
Contribution (EFC) of 0 for the award year coinciding with
the same 12-month period just described, or is defined as an
adjusted gross income (AGI) of the student and the student's
parents or spouse, if applicable, that is less than the poverty
level as determined by the U.S. Department of Health and
Human Services.

- at least 70% of a degree-granting school's students who were
initially enrolled as full time and who were scheduled to
complete their programs within the same 12-month period
described previously, do complete their programs, transfer to
higher level educational programs, or remain enrolled and are
making satisfactory academic progress at the end of the 12-
month period; and

- a non-degree-granting school 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 school has chosen to
determine the percentage of students that come from
disadvantaged economic backgrounds.

- 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 school's
FFEL Program cohort default rate, Direct Loan Program cohort
rate or weighted average cohort rate by the percentage of the
school's 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 school's rate is determined.

Institutions with cohort default rate above 40%) my not appeal
loss of eligibility on this basis.

Appeals of loss of eligibility due to a school's default rate should be
sent to the Default Management Division at the address listed on
page 10-95. Questions concerning a school's cohort default rate and
its consequences should be directed to the Default Management
Division at the address and telephone number listed on that page.

The Department issues a decision on an institution's appeal within 45
calendar days after submission of the complete appeal.

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 refund
policies. 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:

- ALL schools (except foreign schools) wishing to participate in the
FFEL Program must develop a default-management plan for the
Department's approval 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
diplomas or their equivalents 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 State Student Incentive Grant (SSIG) and Byrd
Scholarship programs. See Chapter 3 for more details on GED
requirements.

- For Stafford Loans 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 3 of this chapter for more on this requirement.

- Late disbursements of Stafford Loans are subject to certain
restrictions. See Section 3, for more information.

- A Stafford Loan borrower who is entering the first year of an
undergraduate program--and who has 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 borrower's FFEL loan is disbursed
by EFT or by master check, a school may not request the
disbursement of the borrower's loan proceeds until the 24th day of
the student's period of enrollment.

- A school is required to provide to the appropriate lender--on
behalf of each student borrower--a disbursement schedule that
meets Stafford Loan and PLUS Loan disbursement requirements.
See Section 3.

- Each school participating in SFA Programs is required to have a
fair and equitable refund policy.

Unless a school's policy is more stringent, the school 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.

Last Modified: 07/28/1998