Cohort Default Rate Changes in the HEOA

 Changes made by the Higher Education Opportunity Act (HEOA) alter the current Cohort Default Rate (CDR) definition by including more time in a borrower's repayment period in the CDR calculation. That definition doesn't affect institutional eligibility until Oct. 1, 2011, but it will include students that began repaying loans on Oct. 1 2008.

New CDR Calculation

Beginning with Fiscal Year 2009, the CDR formula includes 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 Oct. 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.

The new formula will be used to calculate rates beginning with FY 2009, but 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, 2011). Until then, the law requires rates calculated under the current formula to be used.

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.

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 website 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:

  • Identify factors causing the high CDR at the school;
  • Establish measurable objectives to lower the CDR; and
  • Specify actions that the school can take to improve student loan repayment.

    These plans must then be submitted to the Department for review. The Secretary is required to offer technical assistance to the institution to improve the CDR.

    Consequences for Second Year Offenders 

    Schools with CDRs that equal or exceed the minimum CDR threshold for two consecutive years must review, revise, and resubmit their amended plan to the Department for review. The Secretary can amend the plan and require the school to take specific actions that will lead to, measurable results to lower the CDR.

    The HEOA provides schools with regulatory relief from any punishment from the Secretary if it can prove to the Department that it meets "exceptional mitigating circumstances," such as: having a disproportionate number of Pell-eligible students or low-income students, having high numbers of students transfer from the school to a higher level educational program, or having a large number of students enter the armed forces. The complete list of acceptable appeals and mitigating circumstances can be found in Section 435(a)(3)-(a)(5) of the HEA and Section 668.194-.197 of regulations.

    School Default Resources  

    • Cohort Default Rate Guide: Includes information on how schools can obtain default rate information, loan record detail reports, and guidance on reviewing and improving cohort default rate data

    Publication Date: 9/12/2009

    Related Content

    Default Facts and Tips for Struggling Borrowers


    Cohort Default Rate Issue Brief


    View Desktop Version