Cohort Default Rates

Community colleges are concerned about student loan default and are already actively working to help students be successful in repaying their loans. This page helps to explain the default metric, its limitation and impact for community colleges, and potential federal policy changes.

About Cohort Default Rates

Federal student loan borrowers typically must begin repaying their loans six months after graduating, leaving school, or dropping below half-time enrollment. If borrowers make no payments for any period of 270 days, or roughly 9 months, they will default on their student loans. Default rates for a given federal fiscal year encompass the cohort of borrowers who entered repayment during that year. The U.S. Department of Education (ED) calculates annually the percentage of borrowers who default for each college that has participated in the federal student loan program.

ED has calculated CDRs since the late 1980s, when the measure began tracking the share of federal student loan borrowers who default on their student loans within two years of entering repayment. The Higher Education Opportunity Act of 2008 expanded that window to three years (commonly referred to as “three-year” CDRs). For FY 2011, the official 3-year CDR is 13.7 percent for all institutions of higher education and 20.6 percent for community colleges. The FY 2011 rates now in effect marked the first time that any institutions could be sanctioned based on the new three-year rates, and ACCT released a statement regarding these CDRs.

Federal CDR Calculation

Federal calculation method for three-year CDRs

In recent years, converging challenges have contributed to rising default rates, including a lagging economy, high unemployment, and rising college costs. At the same time, state funding for public higher education has dwindled, adding to growing competition for resources in financial aid and student advising offices that help to counsel borrowers on repayment options and obligations. ACCT is working actively to support its members by informing policymakers of the complexity of default at open access institutions, the limitations of CDRs, and necessary federal policy changes to improve student loan repayment.

CDRs at Community Colleges

The current federal calculation of default is incomplete for community colleges for a number of reasons, and should be interpreted with great caution. CDRs measure only the outcomes of borrowers entering repayment, not those who don't borrow at all. With community college tuition and fees averaging the lowest of any sector of higher education, many students choose not to borrow. Those who do borrow at community colleges have the lowest average federal loan balance of all sectors. Rates of borrowing vary widely from campus to campus, and some colleges do not participate in the federal student loan program.

According to the latest federal data available, just 17 percent of public two-year students borrow federal student loans, compared to 56 percent of students across all other sectors of higher education. When combined with the fact that approximately one-fifth of these student borrowers default on their loans, cohort default rates represent less than 4 percent of community college students.

Low Borrowing at CCs

Source: U.S. Department of Education, National Center for Education Statistics, 2011–12 National Postsecondary Student Aid Study (NPSAS:12); U.S. Department of Education, Federal Student Aid, FY 2011 Three-year Official Cohort Default Rates for Schools.

Default rates also do not reflect distinct cohorts of exiting or graduating students as they do at some four-year institutions with more "traditional" degree pathways. The cohorts within official default rate calculations do not correspond to a group of students who started school or graduated at the same time, but rather only those who entered repayment on their loans in the same fiscal year. However, the enrollment intensity of community college students varies widely, with 60 percent of students nationwide attending part time. Many community college borrowers have also transferred to other institutions before entering repayment. This limitation of default calculation creates challenges for measuring the impact of deliquency and default reduction efforts that are targeted toward current students, as the results may not be seen for several years and will be inherently mixed between cohorts of students entering repayment at different times.

 

Consequences of Default

Consequences of default for students can be severe. Outstanding interest on the loan is capitalized and collection fees may be added, often resulting in a balance that is higher than the amount initially borrowed. Defaulted loans are reported to credit bureaus, causing borrowers to sustain long-term damage to their credit rating. A defaulter may also face difficulty in securing a mortgages or car loan, may have their wages garnished, and their federal income tax refunds and other federal benefits seized. Until the default is resolved (i.e. through rehabilitation or garnishment), collection efforts continue and the defaulter will be ineligible for additional federal student aid.

When a college’s CDR is too high, it may face sanctions that include losing eligibility for Title IV federal aid programs, including both loans and Pell Grants. Institutions with three consecutive CDRs of 30 percent or higher lose eligibility for Pell Grants and federal loans, subject to appeal. CDRs above 40 percent may impact institutions’ eligibility for federal loans only, subject to appeal. Colleges have the opportunity to challenge or appeal their CDR calculation and any subsequent sanctions, both before and after CDRs become public. Many common appeals pertain to data errors, which, if fixed, would yield a lower CDR. Some schools may also be eligible to appeal if they have a significant share of low-income students, or if fewer than 21 percent of students at the institution borrow (known as a Participation Rate Index appeal).

Recommendations for Federal Policy

In a recent report published in collaboration with The Institute for College Access and Success (TICAS), Protecting Colleges and Students, ACCT makes a number of key recommendations for federal policy to reduce deliquency and default. These recommendations include:

1. Support institutional administrators and staff who seek to understand and reduce default. The U.S. Department of Education (the Department) could help by making the National Student Loan Data System more user-friendly for college administrators and by disseminating guidance on colleges’ options for managing student debt and preventing delinquency and default.

2. Improve the administration of CDR challenges and appeals. CDR challenge and appeal options can be critical lifelines for institutions that may face sanction, yet the Department’s current implementation of challenges and appeals – of particular importance to community colleges – appears to be discouraging participation in the federal student loan program.

3. Improve entrance and exit counseling. Entrance and exit counseling are required for any student who receives a federal student loan. Yet the information presented via loan counseling is not always timely or well understood. There is much the Department can do to help since so many colleges use the Department’s online counseling tools.

4. Improve and streamline loan servicing. Students who borrow often report that the system of loan servicing is very confusing. The system should be simplified so that borrowers receive communications branded from the Department and have access to a single web portal and a single phone number for loan management.

5. Consider changes to federal student loan amounts for part-time students. Unlike Pell Grants, federal loans are not prorated based on a student’s attendance status. The Department should analyze whether prorating federal student loans by attendance status would help encourage students to enroll in more courses per term and/or reduce the risks of debt for part-time students.

6. Automatically enroll severely delinquent borrowers in income-driven repayment. By enrolling severely delinquent borrowers in an income-driven plan and engaging in follow-up contact and counseling, the Department may be able to prevent likely defaults and the associated costs for both borrowers and taxpayers.

7. Implement a Student Default Risk Index (SDRI) for college accountability. The utility of CDRs is limited since they exclude students who do not borrow, and therefore fail to contextualize the scope of default problems at colleges. The SDRI more accurately conveys a student’s risk of default at a given school by multiplying schools’ CDRs by the share of students who borrow federal loans. An SDRI would help ensure that federal aid dollars are spent wisely by more closely tying federal aid to the risk to students in enrolling and the risk to taxpayers in investing.

To read more about CDRs and federal policy recommendations in this report, visit: