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AwardYear: 1998-1999 EnterChapterNo: 11 EnterChapterTitle: William D. Ford Federal Direct Loan Program SectionNumber: 4 SectionTitle: Default PageNumbers: 57-70 hb11-64.pdf   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 the loan becomes 180 days delinquent (or if they fail to meet other terms of the promissory note for 180 days) and 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 cannot receive deferments, except in the limited circumstances described on page 11-34. However, forbearance may be available. [[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 generally 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. The borrower is eligible for SFA funds, and regains eligibility for deferments. [[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 2, Section 2. 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 schools 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. A school that does not challenge the data during the draft data review process may not challenge that same data at any other time. 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 with scheduled payments of 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 receives another Direct Loan, and subsequently defaults on both loans 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 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 Bylsma Conservatory entered repayment on their loans. By the end of FY 1996, 20 of those students, or one-fourth, had defaulted. Bylsma Conservatory's FY 1995 cohort default rate is 25%. 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 Bylsma'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: FY 1995 FY 1996 FY 1997 10 + 5 + 5 = 20 --------------------------------------------- X 100 percent 15 + 25 + 20 = 60 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 Bylsma 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 Bylsma's FY 1995 cohort default rate. Here are examples of three students who attended Bylsma and who subsequently defaulted: - Anner 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, Anner will continue to be counted as being in default in Bylsma'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 Bylsma'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 11-60, 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. The following is an example of how the cohort default rate is calculated for a non-degree-granting proprietary school with 30 or more borrowers in repayment. In FY 1995, 80 current and former Direct Loan borrowers at Guerrero Technical Institute entered repayment on their loans. By the end of FY 1996, 20 of those students, or one-fourth, had defaulted. In addition, 8 of those students were repaying loans under the ICR plan and had the low payments described above for 270 days. 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) + Number of students who entered repayment in FY A who had specified low ICR payments for 270 days ------------------------------------------ X 100 percent Number of students who entered repayment in FY A Guerrero's default rate is 35% (20+8/80 X 100 percent = 35%.) 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. The example below shows how the cohort default rate is calculated for a non-degree-granting proprietary school with fewer than 30 borrowers in repayment. Benoit Institute had 15 borrowers who entered repayment in FY 1995; 10 of those defaulted by the end of FY 1996, and 3 had the low ICR payments described above for 270 days. Benoit had 25 borrowers entering repayment in FY 1996; 5 of those defaulted by the end of FY 1997, and none had low ICR payments. Benoit had 20 borrowers entering repayment in FY 1997; 5 of those defaulted by the end of FY 1998, and 1 had the low ICR payments. Benoit's FY 1997 cohort default rate would be calculated as follows: FY 1995 FY 1996 FY 1997 10+3 + 5+0 + 5+1 = 24 -------------------------------------------------- X 100 percent 15 + 25 + 20 = 60 Benoit's default rate is 40% (24/60 X 100 percent = 40%.) 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. [[This file contains the chart summarizing borrowers included in a weighted average cohort rate on page 11-64 in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]] Once the number of borrowers in the cohort is determined, the calculation of the weighted average is similar to the calculation of the Direct Loan Program cohort default rate just described. Cohort Default Rates for Schools that Change Status Default reduction measures apply to all divisions and locations of a school. If a school changes its status (by branching, consolidating, or changing ownership, for example) the Department will track and impose appropriate consequences for cohort default rates for fiscal years both before and after the change in status. If a location becomes a free-standing school: A school that is a location of a proprietary vocational or vocational postsecondary school and that is seeking institutional eligibility in its own right, is required to operate independently from its former "parent" school for at least two years before it is eligible to participate in SFA Programs. If a school changes ownership: If the new owner applies for eligibility to participate in the SFA Programs as a continuation of the old school, the new owner remains 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 prior to the change of ownership may affect the school's ability to participate in SFA Programs. In fact, a school undergoing a change of ownership may be refused certification for participation in any SFA Program or may be granted provisional certification on the basis of current cohort default rates. The Department is required by law to use procedures that prevent a school from evading the application of a cohort default rate determination through such measures as branching, consolidation, change of ownership or control, or other similar device. Specific information on how cohort default rates for prior fiscal years are used for eligibility determinations following a change in status for a school was not available at the time this Handbook went to print. The Department will issue further guidance on this topic in the form of "Dear Colleague" Letters. When issued, this up-to-date information will also be available on the SFA BBS. 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% that they are in danger of facing sanctions. [[Cohort default rates of 25% 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% or greater for the three most recent 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 successfully appeals the loss of eligibility on the basis of erroneous data or exceptional mitigating circumstances. 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% for the three most recent fiscal years for which data are available. This exemption for these schools extends to July 1, 1998. 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%]] 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% 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%, 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 time frames 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% 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%) 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%. 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% 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. A school cannot use alleged errors in the draft cohort default rate that were not challenged in the draft review process as a basis for an appeal. 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% 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. The school must meet the following requirements: - at least 70% of its regular students are from disadvantaged economic backgrounds, for a 12-month period that ended during the 6 months immediately preceding the fiscal year used to determine the cohort of borrowers for the school's rate. Note that "disadvantaged" is defined as an Expected Family Contribution (EFC) of 0 for the award year coinciding with the same 12-month period just described, or is defined as an adjusted gross income (AGI) of the student and the student's parents or spouse, if applicable, that is less than the poverty level as determined by the U.S. Department of Health and Human Services. - at least 70% of a degree-granting school's students who were initially enrolled as full time and who were scheduled to complete their programs within the same 12-month period described previously, do complete their programs, transfer to higher level educational programs, or remain enrolled and are making satisfactory academic progress at the end of the 12 month period; and - a non-degree-granting school had a placement rate of 50% or more with respect to its former regular students who remained in the program beyond the point the students would have received a 100% tuition refund from the institution. This rate is based on the number of students initially enrolled at least half time who were scheduled to complete their program within the same 12-month period the school has chosen to determine the percentage of students that come from disadvantaged economic 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

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