In less than two weeks the Department will release the official cohort default rates (CDR) for Fiscal Year 2006 to schools participating in the FFEL and DL programs. The CDR shows the percentage of a school's borrowers who enter repayment on Stafford loans in one fiscal year and default prior to the end of the next fiscal year. So, borrowers who entered repayment during FY 2006 (which runs from October 1, 2005, through September 30, 2006) and defaulted on or before September 30, 2007, will be used to calculate a school's 2006 cohort default rate.

But recent changes made by the Higher Education Opportunity Act (HEOA) will alter that definition by including more time in a borrower's repayment period in the CDR calculation. Even though that definition doesn't affect institutional eligibility until October 1, 2011, it will involve students going into repayment during the fiscal year about to begin.

New CDR Calculation

Beginning with Fiscal Year 2009, the new CDR formula will include students who default by the end of the second fiscal year after beginning repayment. The current CDR looks at up to two fiscal years - the one in which the borrower began repayment and the following one. The new formula looks at up to three fiscal years - the one in which the borrower began repayment and the following two. Borrowers who enter repayment between October 1, 2008, and September 30, 2009, and default on or before September 30, 2011 (rather than 2010), will be used when determining an institution's cohort default rate.

Although the new formula will be used to calculate rates beginning with FY 2009, it will not be used to determine whether any high default rate sanctions apply until three years' worth of rates under the new formula are available (i.e., sometime after October 1, 2013). Until then, the law requires rates calculated under the current formula to be used. ED will likely have to calculate two rates for FY2009 and FY2010, although ED's interpretation of these changes has not yet been made available.

Legislators hope that this new measurement will provide a more accurate picture of student loan default, but schools should prepare today so they are not caught off guard by the change. Schools should work with their respective guaranty agencies (contact Tim Fitzgibbon, vice president with the National Council of Higher Education Loan Programs for help finding your primary guarantor) or with the Department's default management team to calculate what their three-year CDR would be today to have a benchmark for the next few years. In addition, the change offers an opportunity for colleges to review their default prevention efforts to determine new ways to help students avoid default after they leave school. Default prevention should not be the responsibility of just the financial aid office, but the financial aid office is in the best position to provide leadership in collaborating with other departments on campus to effectively address the reasons why students default.

Changes in Rewards and Penalties

Since the new CDR will include a longer period of repayment history, most schools will likely see increases in their CDRs. As a compromise, legislators changed several provisions that reward and penalize schools based their CDRs. Beginning Oct. 1, 2011, schools will be allowed to disburse any FFELP or DL loan in a single disbursement for any period of enrollment that is not more than one semester, trimester, quarter, or four-month period as long as they have a CDR that is less than 15 percent (previously 10 percent) for the three most recent fiscal years.

The HEOA increases the minimum CDR threshold schools must meet in order to continue participation in Title IV programs from 25 percent to 30 percent for fiscal year 2012. The law also increases the participation rate index from .0375 to .0625 for schools to be exempt from the minimum CDR threshold requirement. The participation rate index measures the number of students who obtain loans compared to the number of regular students at the school. If a low percentage of a school's students take out loans, that school is exempt from the minimum threshold requirement.

Each year the Secretary will be required to report life cohort default rates in addition to the CDRs already being reported by the Department. Both the CDRs and the life cohort default rates must be broken down for each category of institution: four-year public, four-year private nonprofit, two-year public, two-year private nonprofit, four-year proprietary, two-year proprietary, and less than two-year proprietary.

All schools - no matter how high or low the CDR - will have their CDRs listed on the Department's College Navigator Web site to help students and parents weigh college options.

Consequences for First Year Offenders

The first time an institution's CDR equals or exceeds the minimum threshold set by Congress (30 percent in 2012), the school will be required to establish a default prevention task force to: