Sens. Jeanne Shaheen (D-NH) and Orrin Hatch (R-UT) introduced a bill on August 5 to increase risk-sharing in administering federal student aid by institutions. Citing problems with the current default rate metric, the senators propose to replace default rates with a new measure of institutional accountability based on Direct Loan repayment rates. The “Student Protection and Success Act” would require a school’s repayment rate to be high enough to justify continued participation in the federal student loan program. Schools with repayment rates that do not exceed a certain cut-off rate would lose eligibility to participate in the Direct Loan Program, Perkins Loan Program, and Pell Grant Program for at least two fiscal years.
The “cohort repayment rate” would represent the percentage of borrowers who entered repayment in a fiscal year cohort, who make at least one dollar reduction in principal before the end of the second following fiscal year. Thus, the calculation would be performed by dividing borrowers paying down their loan principal by all borrowers who entered repayment in the cohort year. (A rate would be calculated only if 30 or more borrowers enter repayment in the cohort year.) Defaulted borrowers would not be counted in the number of borrowers who have paid down their loans. Not included at all in the calculation would be borrowers who are in mandatory forbearance or who are in deferment, other than deferment for economic hardship or for seeking but unable to find full-time employment. The description of the repayment rate calculation in the bill differs somewhat from the repayment rate defined in recent gainful employment regulations.
The cut-off rate leading to ineligibility to participate would be 45 percent in the first fiscal year. For subsequent years, the cut-off would be the higher of the previous year’s cut-off rate, or the average repayment rate for the previous fiscal year, lowered by 10 percentage points (but may never equal or exceed 70 percent). The Department of Education (ED) would calculate two averages, one for two-year institutions and one for four-year institutions. The bill would require institutions to file appeals of lost eligibility within 30 days of rate notification.
The bill would require institutions to make risk-sharing payments to ED based on the total principal amount of Direct loans (other than PLUS loans) made to students to attend the institution, that came into repayment in the third preceding fiscal year, including loans that were deferred or granted forbearance during that year. This figure is the “cohort loan balance.” The “cohort nonrepayment loan balance” would be those loans on which borrowers have not made at least a one dollar reduction in principal in the three fiscal years since the loans entered repayment, deferment, or forbearance. However, loans in certain types of deferment (unrelated to economic hardship or seeking employment) or mandatory forbearance would not be included.
The cohort loan balance would be multiplied by the average national unemployment rate for the previous three years. The result of that calculation would be subtracted from the cohort nonrepayment loan balance, and the risk-sharing payment would be 20 percent of that difference.
The bill would establish a “College Opportunity Bonus Program” under which ED would use the risk-sharing payments to award grants to institutions with a strong record of making college more affordable and increasing college access and success for low- and moderate-income students. Institutions could use these grants to award additional aid to Pell-eligible students, enhance academic and student support services, and provide accelerated learning opportunities.
Publication Date: 8/7/2015