Maintained for Historical Purposes

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

William D. Ford Federal Direct Loan Program - Default

AwardYear: 1997-1998
EnterChapterNo: 11
EnterChapterTitle: William D. Ford Federal Direct Loan Program
SectionNumber: 4
SectionTitle: Default
PageNumbers: 53-66


The first part of this section discusses default's effect on borrowers
and actions they can take to regain eligibility for SFA funds. The
second part deals with default from the school's perspective and
presents information on cohort default rates and the consequences for
schools with rates above certain levels.

DEFAULT'S EFFECT ON BORROWERS

If borrowers fail to make any installment payment when due, the
loan becomes delinquent. The Direct Loan Servicing Center makes
repeated attempts to contact borrowers by telephone and letter, uses
skip-tracing techniques and the assistance of other government
agencies to locate borrowers if their whereabouts become unknown,
and resolves repayment problems with delinquent borrowers to
prevent defaults. Borrowers (or endorsers, if applicable) who become
delinquent or default may be required to pay collection costs.

[[Definition of default]]
Borrowers are in default if they fail to make a payment for 180 days
or if the Department concludes they do not intend to honor their
obligation to repay.

The Department will "accelerate" a defaulted loan, that is, declare the
entire balance and accrued interest immediately due and payable.

[[Department actions against borrowers who default]]
The Department may take any action authorized by law to collect a
defaulted Direct Loan, including

- filing a lawsuit against the borrower,

- reporting the default to national credit bureaus,

- requesting the Internal Revenue Service to offset the borrower's
federal income tax refund, and

- garnishing the borrower's wages.

Before reporting the default to a national credit bureau or assessing
collection costs, the Department gives the borrower written notice of
its proposed actions, an opportunity to enter into a repayment
agreement, and an opportunity for a review of the loan's status. Once
the Department notifies a credit bureau of a borrower's default, the
credit bureau may provide credit inquirers with that information for
up to seven years from the date the loan is first reported as a default
or, for a borrower who reenters repayment and again allows the loan
to default, up to seven years from the date of the second default.

The Department may designate the Income Contingent Repayment
Plan for a borrower who defaults on a Direct Subsidized or
Unsubsidized Loan or a Direct Subsidized or Unsubsidized
Consolidation Loan. (The Income Contingent Repayment Plan
is not available for Direct PLUS Loans and Direct PLUS
Consolidation Loans.) Further, a borrower in default may not
receive deferments, although forbearance may be available (see
"Deferment" in Section 2.)

[[Reinstatement of borrower eligibility]]
Borrowers in default are ineligible for SFA funds but can take certain
actions to have eligibility reinstated. As mentioned in Section 1, a
borrower may repay a defaulted loan in full or make satisfactory
repayment arrangements, defined as six consecutive, voluntary, on
time, full monthly payments that are reasonable and affordable given
the borrower's financial situation. "On time" means a payment made
within 15 days of the scheduled due date. "Voluntary" payments are
those the borrower makes directly, whether or not a judgment exists.
Voluntary payments do not include those obtained by income tax
offset, garnishment, or income or asset execution. For purposes of
regaining eligibility, a student may make satisfactory repayment
arrangements on a defaulted Direct Loan only once. For purposes of
consolidating a defaulted loan, three payments are required instead
of six; generally, a borrower may instead agree to repay the
consolidation loan under the Income Contingent Repayment Plan.
For more information on consolidating defaulted loans, see
Section 3.

If a borrower regains eligibility during an enrollment period (for
example, if the sixth payment under a satisfactory repayment
arrangement is made after the start of an enrollment period), the
borrower regains eligibility for the entire loan period.

[[Requesting forbearance while in school]]
A borrower who makes satisfactory repayment arrangements and
regains SFA eligibility must continue to make payments on the
defaulted loan. (A borrower who is unable to do so while attending
school should request forbearance on the loan--as mentioned above,
deferment is not an option for borrowers in default. See Section 2 for
a discussion of forbearance.)

[[Rehabilitation]]
If a borrower whose loan is in default makes 12 consecutive, on
time, reasonable, and affordable monthly payments under a
satisfactory repayment agreement (which may include the six
consecutive monthly payments necessary to regain SFA eligibility),
the loan is "rehabilitated." In such a case, the Department instructs
any credit bureau to which the default was reported to remove the
default from the borrower's credit history.

[[Reaffirmation]]
A loan on which collection activities have ceased because the
Department has not been able to collect is still considered a defaulted
loan for purposes of borrower eligibility. A borrower who wishes to
borrow again under the Direct Loan Program must "reaffirm" the
loan amount and make satisfactory repayment arrangements, as
previously described. Because reaffirmation means legal
acknowledgment of the loan, the borrower may have to sign a new
promissory note or repayment schedule. Reaffirmed loans count
toward a borrower's aggregate loan limits (see Section 2 for a
discussion of loan limits).

A borrower whose loan obligation is discharged in bankruptcy after
the borrower has defaulted is again eligible for SFA Program funds
(see Section 1).

[[Sources of information about a borrower's default]]
The Institutional Student Information Record (ISIR), Student Aid
Report (SAR), or SAR Information Acknowledgement alerts schools
that a borrower is in default on a federal education loan and is not
eligible for federal financial aid. If the borrower has made
satisfactory repayment arrangements, these documents will indicate
the borrower is eligible for a loan but will include a warning that if
scheduled payments are not made on the previous loan, future federal
student aid will be denied. This information should be reconciled
with documentation from the Direct Loan Servicing Center stating
that repayment requirements continue to be satisfied. Schools must
keep this documentation in the student's file. Once the information is
reconciled, the student's eligibility for federal student aid funds can
be evaluated.

A borrower's financial history, which includes information about
default, results from a data match between the Central Processing
System (CPS), which processes data from the Free Application for
Federal Student Aid (FAFSA), and the National Student Loan Data
System (NSLDS). For more information on the NSLDS, see
Chapter 3.

DEFAULT'S EFFECT ON SCHOOLS

Because FFEL Program cohort default rates have been a useful
measure of institutional performance and an effective means of
reducing defaults by removing high default institutions from the
FFEL Program, the Department has established a similar cohort
default rate measurement for the Direct Loan Program. Definitions of
"cohort default rate" and "institutional eligibility requirements" for
the Direct Loan Program are based on the percentage of a school's
former students who default on Direct Loans.

[[Cohort default rates]]
Each year, the Department gives schools draft cohort rates along
with the Department's Draft Cohort Default Rate Review Guide.
After schools have reviewed their rates and had a chance to resolve
any errors with the Department, the Department publishes the official
cohort rates and notifies schools of their rates.

Official cohort rates are based on the number of a school's former
students who enter repayment in one fiscal year and default before
the end of the next fiscal year. For purposes of a school's Direct Loan
cohort rate, a Direct Loan is considered in default when the
borrower's (or endorser's) failure to make an installment payment
when due persists for 270 days. For non-degree-granting proprietary
institutions, a loan is also considered in default if the student has
been in repayment under the Income Contingent Repayment Plan for
at least 270 days, and the borrower's scheduled payments are less
than $15 and less than the monthly interest accruing on the loan.

A student who receives a Direct Loan from one school, later
transfers, and subsequently defaults will count in EACH school's
default rate.

Public, Private Nonprofit, or Proprietary Degree-Granting Schools

For any fiscal year during which 30 OR MORE current and former
students at a school enter repayment on Direct Loans used for
attendance at the school (or enter repayment on the portion of a
Direct Consolidation Loan used to repay those loans), the Direct
Loan Program cohort default rate is the percentage of students who
enter repayment in that fiscal year ON BOTH FFELS AND DIRECT
LOANS whose loans are in default before the end of the following
fiscal year.

The following is an example of how the cohort default rate is
calculated for a school with 30 OR MORE borrowers in repayment.

In FY 1995, 80 current and former Direct Loan borrowers at Van
Dam Conservatory entered repayment on their loans. By the end
of FY 1996, 20 of those students, or one-fourth, had defaulted.
Van Dam Conservatory's FY 1995 cohort default rate is 25
percent.

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 percent
Number of students who entered
repayment in FY A

Van Dam's default rate is 25% (20/80 X 100 percent = 25%.)

For any fiscal year in which FEWER THAN 30 of the school's
current or former students enter repayment as described above, the
Direct Loan Program cohort default rate is the percentage of those
students who

- entered repayment in any of the three most recent fiscal years, and

- whose loans are in default before the end of the fiscal year
immediately following the fiscal year in which they entered
repayment.

The example below shows how the cohort default rate is calculated
for a school with FEWER THAN 30 borrowers in repayment.
Because a cohort default rate calculation was not done for Direct
Loans until FY '95, the years in this example will be projected; the
principle is the same, however.

Illyria Institute had 15 borrowers who entered repayment in
FY 1995; 10 of those defaulted by the end of FY 1996. Illyria
had 25 borrowers entering repayment in FY 1996; 5 of those
defaulted by the end of FY 1997. Illyria had 20 borrowers entering
repayment in FY 1997; 5 of those defaulted by the end of
FY 1998. Illyria's FY 1997 cohort default rate would be calculated
as follows:

[[The calculation on page 11-57 is currently unavailable for viewing.
Please reference your paper document for additional information.]]

Illyria's default rate is 33.3% (20/60 X 100 percent = 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,
let's take Van Dam Conservatory's FY 1995 cohort default rate.
Those students who enter repayment in FY 1995 (10/1/94--9/30/95)
and default before the end of FY 1996 (10/1/95--9/30/96) are
counted in Van Dam's FY 1995 cohort default rate. Here are
examples of three students who attended Van Dam and who
subsequently defaulted:

- Andrew entered repayment in October 1994 and subsequently
defaulted in May 1996. He won $10,000 in a lottery in November
1996 and promptly repaid his loan in full. Nevertheless, Andrew
will continue to be counted as being in default in Van Dam's
FY 1995 cohort default rate calculation.

- Olivia defaulted in July 1996 but made satisfactory arrangements
to repay her loan in December 1996. For purposes of calculating
Van Dam's FY 1995 cohort default rate, Olivia continues to be
counted as in default.

- Jesse made payments on a loan that entered repayment in
FY 1995. In spring 1996, Jesse lost his job; unable to find another,
he defaulted on his loan in November 1996. Because Jesse's
default occurred after the FY 1995 cohort default rate calculation
period ended (after September 30, 1996), his loan was reported
only as being in repayment. Jesse's loan is not counted as a default
in ANY fiscal year's cohort default rate calculation.

Proprietary Non-Degree-Granting Schools

For any fiscal year during which 30 OR MORE current and former
students at the school enter repayment as described on page 11-56,
the Direct Loan Program cohort default rate is the percentage of
those students

- who enter repayment in that fiscal year whose loans are in default
before the end of the following fiscal year, or

- who, before the end of that following fiscal year, have for 270
days been in repayment under the Income Contingent Repayment
Plan, with scheduled payments that are less than $15 a month and
less than the interest accruing on the loan.

See the first example on page 11-57.

For any fiscal year in which FEWER THAN 30 of the school's
current or former students enter repayment as described previously,
the Direct Loan Program cohort default rate is the percentage of
those students

- who entered repayment in the three most recent fiscal years whose
loans are in default before the end of the fiscal year immediately
following the year in which they entered repayment, or

- who, before the end of that following fiscal year, have for 270
days been in repayment under the Income Contingent Repayment
Plan, with scheduled payments that are less than $15 a month and
less than the interest accruing on the loan.

See the second example on page 11-57.

Weighted Average Cohort Rate (Dual-Program Cohort Rate)

If there are both FFELs and Direct Loans entering repayment in the
school's cohort, the Department calculates a WEIGHTED
AVERAGE COHORT RATE, also known as a DUAL-PROGRAM
COHORT RATE. The Department bases this rate on the number of
borrowers, not the number of loans. For example, if a borrower
enters repayment on both FFELs and Direct Loans in the same
cohort, the student will be counted only once in the calculation used
to determine the cohort default rate. A summary of borrowers
included in the types of cohort default rates is presented below.

[[The "summary of borrowers included in the types of cohort default
rates" on page 11-59 is currently unavailable for viewing. Please
reference your paper document for additional information.]]

Cohort Default Rates for Schools that Change Status

Default rates apply to ALL divisions and locations of a school as it
exists on the first day of the fiscal year for which the rate is
calculated. The rates continue to apply to all divisions and locations
from the date the school is notified of its rate until the Department
notifies the school that the rate no longer applies. When a school
changes its status--by branching, consolidating, or changing
ownership, for example--the school's cohort default rate is reviewed
based on its new status. These changes affect both the draft and the
official cohort default rate calculations for each school.

[[From a location (branch) to a freestanding school]]
A school that was formerly a branch of another proprietary,
postsecondary vocational, or vocational school and that seeks
institutional eligibility in its own right must operate independently
from its former "parent" school for at least two years before being
eligible to apply for Direct Loan participation. If the school is
eligible to participate, the Department will calculate the Direct Loan
Program cohort default rate or weighted average default rate based
on the school's status as of October 1 of the fiscal year for which the
rate is being calculated.

[[From a freestanding school to a separate location (branch) of
another school]]
To calculate an official cohort default rate for a school that has
acquired a freestanding school as a branch, the Department will
combine the number of students who enter repayment during the
applicable fiscal year and the number of students who default during
that year for BOTH the former freestanding school and the other
school. The new cohort default rate is the newly consolidated
school's official cohort default rate and will apply to ALL ITS
BRANCHES.

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

[[The example calculation on page 11-60 is currently unavailable for
viewing. Please reference your paper document for additional information.]]

[[From a location (branch) of one school to a location of another
school]]
For a school that changes from being a branch of one school to being
the branch of another, the Department will combine borrower
repayment and default data as just described for the change from a
freestanding school to a branch campus. The Department will
combine the school's former "parent" repayment and default data and
its new "parent" repayment and default data and use it to calculate a
revised official default rate for the new "parent" school AND FOR ALL
ITS BRANCHES.

[[Two or more freestanding schools merge]]
If two or more freestanding schools merge, the Department
calculates the cohort default rate by combining the number of
students who enter repayment and the number of students who
default, then calculating an official cohort default rate for each
school.

[[School changes ownership]]
A new owner applying to participate in SFA Programs as a
continuation of the old school is 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 before the ownership change may affect
the school's ability to participate in SFA Programs. A school
changing ownership may be refused certification to participate in any
SFA Program, or may be granted provisional certification, based on
high cohort default rates calculated before the ownership change.

Consequences Associated with Official Cohort Default Rates Above
Certain Thresholds

When the Department sends schools their official cohort default
rates, it will include a warning for schools with rates above 20
percent that they are in danger of facing sanctions.

[[Cohort default rates of 25 percent or greater for three consecutive
years]]
If a school has a combination of a FFEL Program cohort default rate,
Direct Loan Program cohort rate, or weighted average cohort rate of
25 percent or greater for the three consecutive fiscal years for which
data are available, the school loses its eligibility to participate in the
Direct Loan Program and is subject to Limitation, Suspension, and
Termination (LS&T) action against participating in the FFEL
Program. A school also can lose its eligibility for the Direct Loan
Program on the basis of a high FFEL Program cohort default rate. A
school ceases to be eligible to participate in Direct Loans beginning
30 days from the date it receives notice of its loss of eligibility,
unless it can demonstrate to the Department's satisfaction that
exceptional mitigating circumstances make the eligibility loss
inequitable.

The Department places an ineligible school on the reimbursement
system of payment until the 30th day following the date the school
receives notification of its eligibility loss or, if the school appeals,
until the appeal is decided. The Department removes a school from
reimbursement if the school's appeal is successful. If the appeal is
denied, the school is not eligible to participate in the Direct Loan
Program for the remainder of the current fiscal year plus the
following two fiscal years.

A school that loses eligibility must immediately inform all current
and potential students and must make clear that they cannot receive
Direct Loans or FFELs for attendance at the school. However,
students who receive a first disbursement on a Direct Loan or FFEL
before the school loses eligibility may receive subsequent
disbursements on those loans. Students attending the school remain
eligible for in-school deferments.

[[Schools not subject to loss of eligibility]]
Historically black colleges and universities (HBCUs), community
colleges that Native American nations control ("tribally controlled"),
and Navajo community colleges will not lose Direct Loan Program
eligibility because of default rates greater than 25 percent for the
three most recent fiscal years for which data are available. This
exemption for these schools extends to July 1, 1998. Schools in these
categories may appeal their cohort rates on the basis of the appeals
described beginning on the next page (erroneous data or exceptional
mitigating circumstances).

To remain eligible to participate in the Direct Loan Program, strict
standards must be met for appeals, as explained below. More
comprehensive information is provided in the Department's official
cohort default rate notification letter and the FY 1995 Official Cohort
Default Rate Guide. Schools must keep the official default-rate
notification letter for program review and audit purposes.

[[Cohort default rates that exceed 40 percent]]
The Department may take LS&T action against a school's
participation in ALL SFA Programs if the school has a Direct Loan
Program cohort rate--or, if applicable, a weighted average cohort
rate--greater than 40 percent for a fiscal year. A school's only
acceptable defense against such an LS&T action is that the rate is not
final. If a hearing officer determines that the cohort default rate on
which the proposed LS&T action is based is not the final rate as
determined by the Department and that the correct rate would be less
than 40 percent, the LS&T sanction will not be imposed.

Appeal Procedures for Schools with High Official Cohort Default
Rates

The type of default rate appeal a school may submit varies depending
on the school's default rate category. Schools must follow the appeal
timeframes and standards set forth in the FY 1995 Official Cohort
Default Rate Guide, or they will be prohibited from challenging their
default rates.

Schools subject to loss of Direct Loan eligibility (those schools with
cohort default rates of 25 percent or greater for the three most recent
fiscal years) may appeal on the basis of erroneous data or exceptional
mitigating circumstances. Schools subject to loss of all SFA
eligibility (those schools with default rates above 40 percent) may
appeal only on the basis that the default rate is not the final rate
determined by the Department and that the correct rate would be less
than 40 percent.

Erroneous Data

A school may appeal on the grounds that the calculated default rate is
not accurate for any of the three fiscal years used to determine the
end of the school's participation in Direct Loans, and that if the
Department recalculated using corrected data, the rate would be less
than 25 percent for any of the three relevant fiscal years. A school
must submit an appeal, in writing, to the Department no later than the
30th calendar day following the date the school receives notification
of the end of its Direct Loan participation.

Exceptional Mitigating Circumstances

A school may appeal under one (or both) of the exceptional
mitigating circumstances that the Department recognizes would
make the school's loss of eligibility inequitable (see below). An
appeal submitted based on these circumstances must contain an
attestation from an independent auditor that the statements the
school's management makes in the appeal are complete, accurate,
and determined in accordance with applicable regulations. The
appeal also must contain a certification, under penalty of perjury, by
the school's chief executive officer that all the information the school
provides to support its appeal is correct.

[[Participation rate index equal to or less than 0.0375]]
The participation rate index criterion is based on a school's FFEL
Program cohort default rate, Direct Loan Program cohort rate, or
weighted average cohort rate and the percent of the school's regular
students enrolled on at least a half-time basis who borrow under the
Direct Loan Program. The rate is calculated by multiplying the
school's FFEL Program cohort default rate, Direct Loan Program
cohort rate, or weighted average cohort rate by the percent of the
school's regular students enrolled at least half time who borrowed
under the Direct Loan Program during a 12-month period that ended
during the six months immediately preceding the fiscal year used to
determine the cohort of borrowers for the school's rate. If this
product is less than or equal to 0.0375, the school would meet the
exceptional mitigating circumstance criterion.

A school may use the participation rate index criterion only if it has a
FFEL Program cohort rate, a Direct Loan Program cohort rate or, if
applicable, a weighted average cohort rate of less than 40 percent for
the most recent fiscal year.

[[Economically disadvantaged background rate]]
To be eligible under the economically disadvantaged background
rate, a school must demonstrate that it SUCCESSFULLY serves
students from economically disadvantaged backgrounds.

A school qualifies by providing documentation that during a 12-
month period that ended during the six months immediately
preceding the fiscal year used to determine the cohort of borrowers
for the school's rate, 70 percent of its regular students came from a
disadvantaged background.

A degree-granting school demonstrates that it successfully serves
students from economically disadvantaged backgrounds by
documenting that 70 percent of its regular students who were initially
enrolled on a full-time basis--and were scheduled to complete their
educational programs during the same 12-month period the school
chose to determine the percentage of students that come from
economically disadvantaged backgrounds--have completed their
educational programs (COMPLETION RATE).

A non-degree-granting school demonstrates that it successfully
serves students from economically disadvantaged backgrounds by
documenting that 50 percent or more of its former regular students
who remained in the program beyond the point they would have
received a 100 percent tuition refund from the school are employed
in an occupation for which the school provided training. This
PLACEMENT RATE is based on those regular students initially
enrolled on at least a half-time basis and originally scheduled to
complete their educational programs during the same 12-month
period the school chose to determine the percentage of students that
come from economically disadvantaged backgrounds. The rate does
not include students still enrolled and making satisfactory academic
progress. Students may be counted as employed only if, on the date
following 12 months after the date of their last day of attendance,
they are employed, or have been employed, for 13 weeks in an
occupation for which the school provided training.

The Secretary issues a decision on a school's appeal within 45
calendar days after the school submits the complete appeal.

Schools should direct questions about cohort rates, the draft review
process, or the appeals process to the Department's Default
Management Division:

U.S. Department of Education
Default Management Division
Portals Building, Suite 6211
600 Independence Avenue, SW
Washington, DC 20202-5353
202-708-9396


General Requirements to Reduce Defaults

[[Consumer disclosure requirements]]
A school that makes marketing claims about its graduates' job
placement must provide completion and job placement rates to
prospective students. In addition, if the state in which a school
operates has licensing requirements for any career field for which the
school provides training, the school must notify prospective students
of those requirements.

All schools must give current and prospective students information
on costs of attendance, programs offered, and the school's refund
policy. A school that makes marketing claims about job placement in
order to recruit students must provide the most recent available data
on employment statistics, graduation statistics, and other information
necessary to substantiate the truthfulness of its claims.

A school with programs that include some correspondence courses
must give current and prospective students coursework and due dates
for lessons, the date by which resident training must begin, the
location of residential training, and the timeframe for completing the
training.

Schools must give current and prospective students the completion
and graduation rates of its full-time undergraduate students enrolled
in certificate or degree programs. The student is counted as having
completed or graduated if, within 150 percent of the time normally
required for the program's completion, 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 these
requirements.

[[Default reduction initiatives]]
The following requirements apply to all schools and are intended to
help reduce the number of borrowers who default.

A school that admits students with no 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 a GED program is nearby and
must inform students of the program's availability. This requirement
applies to all SFA Programs except SSIG and Byrd Scholarship
programs. See Chapter 3 for more details on GED requirements.

As mentioned previously in this chapter, Direct Loan borrowers who
are entering the first year of an undergraduate programÐand who
have not previously received a Direct Loan or FFELÐmay not
receive the first installment of loan proceeds until 30 days after the
first day of the program of study.

All schools participating in SFA Programs are required to have a fair
and equitable refund policy. Unless the school's 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 percent of the enrollment period for which they have
been charged. Chapter 3 explains pro rata refund calculations.

Last Modified: 07/28/1998