TICAS: Policymakers Should Change How Student Loan Defaults Are Measured

By Joelle Fredman, NASFAA Staff Reporter

While policymakers have proposed adjusting or abandoning the cohort default rate (CDR) as a measure of institutional eligibility for Title IV aid and replacing it with other metrics, such as loan repayment rates, a new report from the Institute for College Access and Success (TICAS) argued  there is value in working with what is already in place — as long as it’s improved. 

Author Lindsay Ahlman, TICAS’ associate director of knowledge and research management, argued policymakers should retain the CDR due to the fact that is a “reliable, well-established, and widely understood measure,” noting that holding institutions accountable for their CDRs “has a long track-record of effectively reducing the risk of student loan default.” Still, she wrote there are weaknesses to the measurement that policymakers must address as they work to reauthorize the Higher Education Act (HEA). 

“The [CDR] is a longstanding bipartisan protection against unaffordable debts that has been proven to work. Congress and the Department of Education [ED] should modernize this tool to better protect students and taxpayers from unaffordable debts,” she wrote.

Specifically, Ahlman argued that the maximum allowable CDR is too high, and recommended that policymakers explore lowering the threshold. Currently, individual institutions with default rates of 30% or higher for three consecutive years, or greater than 40% for one year — or both — are subject to sanctions, including a loss of eligibility for one or more federal student aid programs. 

“In using a 30% CDR eligibility threshold, the federal government signals that it is acceptable for large shares of borrowers to quickly default after leaving school,” she wrote. “There are established practices by which colleges can reduce their default rates further, and many — but not all — schools do so. The enactment of CDR rules helped drive down default rates steadily for nearly two decades, and a lower threshold could help continue that progress.”

Ahlman also wrote that moving forward, policymakers should account for institutions' borrowing rates when calculating their CDRs, and proposed switching from a “borrower-based metric” which only measures the number of students at an institution who borrow, to a “student-based” metric to better indicate “where students are at the greatest risk of default.” For example, she wrote, while the same share of students at for-profit institutions and community colleges default on their loans, a student at a for-profit school is 3.5 times more likely to default because more students take out loans in general.

In House Democrats’ bill to reauthorize the HEA, the College Affordability Act (CAA), lawmakers proposed replacing the CDR with an adjusted CDR to account for such discrepancies in institutions' borrowing rates by multiplying the result of dividing an institution’s number of defaulted loans by its number of loans in repayment by the percentage of students who borrow at the institution. 

According to the bill, institutions would be deemed ineligible for Title IV aid for two years if their CDRs exceeded 20% for each of the three most recent fiscal years for which adjusted CDRs were published; 15% for each of the six most recent fiscal years for which adjusted CDRs were published and ED determines the institution has not made adequate progress in meeting standards for student achievement established by the relevant accrediting agency or association; and 10% for each of the eight most recent fiscal years for which adjusted CDRs were published and ED determines the institution has not made adequate progress in meeting standards for student achievement established by the relevant accrediting agency or association. 

This proposal is vastly different from what was offered by House Republicans in the last session of Congress, who proposed to phase out the CDR and replace it with a program-level repayment rate, penalizing schools if their three-year repayment rates fell below 45%. During a markup session of the CAA, one Republican committee member offered this alternative metric as an amendment to the bill, but it was rejected by Democrats.  

Late last month, House Democrats on the education committee voted to move the CAA to the floor for a full vote. While the Senate has yet to introduce a comprehensive bill to reauthorize the HEA, Sen. Lamar Alexander (R-Tenn.), chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, proposed a narrow bill — the FAFSA Simplification Act — that focuses largely on FAFSA simplification, and does not make changes to the CDR. 

In addition, Ahlman argued in the report that CDRs are too vulnerable to manipulation by schools — which ED flagged years ago — and do not provide institutions with incentives to improve their rates due to pass/fail judgements, or an “all-or-nothing approach.” To ensure that schools are not pushing students into forbearance, which Ahlman wrote can “postpone payments and delay, rather than prevent, default,” she argued that policymakers should flag schools “when patterns of default suggest forbearance abuse” and publish five-year CDRs — instead of three-year rates — to include these borrowers.

Ahlman suggested policymakers should incentivize institutions to reduce their default rates by establishing “a range of interim consequences” for schools that fall below the threshold that are less harsh than losing eligibility for federal funds, such as requiring them to submit plans to manage defaults well before their numbers deem them as failing, and be subject to frequent program reviews. 

“Following the introduction of the CDR accountability system three decades ago, the federal government continues to have a strong interest in preventing colleges from consistently leaving their borrowers with unacceptably high risks of default,” Ahlman wrote. “... As policymakers continue working to help more borrowers stay current on their loans, they must strengthen the CDR system to further reduce defaults.”

 

Publication Date: 11/19/2019


Ben R | 11/20/2019 11:38:25 AM

A repayment rate metric is especially crucial for graduate level loans where borrowers typically do not default, but are increasingly relying on loan forgiveness and income based repayment. These borrowers hold a disproportionate amount of the total debt, despite representing a relatively small portion of the borrowers. The potential cost of these loans not being paid is likely even greater than all the defaults.

Mark K | 11/19/2019 1:32:43 PM

The proposal to multiply a college's cohort default rate by the percentage of students who borrow at the college is the same as dividing the number of defaults by the college's enrollment. This would largely leave default rates unchanged at high-cost institutions where most students borrow, such as private colleges and universities, but discount default rates at lower-cost institutions, such as community colleges.
Encouraging low-income students at public colleges to borrow does not make college more affordable.
The proposed changes to the cohort default rates also do not address the main problem with cohort default rates, which is the ease with which they can be manipulated.
A switch to a repayment rate (especially one based on the percentage of loan dollars as opposed to a percentage of loan borrowers) is much less prone to manipulation because it measures actual progress in paying down debt. Borrowers who are in default, delinquent, in a forbearance, in a deferment or in a negatively amortized income-driven repayment plan are not making progress in paying down their debt. There are fine gradations between these statuses, since the loan balance increases with some of them and remains unchanged with others. So, avoiding default by getting a borrower into a forbearance does not yield a better repayment rate. A borrower in a standard repayment plan is making greater progress in paying down debt than a borrower in an extended repayment plan.

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