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Why worry about the CDR now?
Cohort Default Rates (CDR) have become a benchmark of reputation and success. Schools with high CDRs risk, among other issues, participation eligibility in U.S. Department of Education Title IV funding.
The suspension gave students and schools a break, and maybe even a false sense of security. As you look forward, diligence needs to be taken now to prepare for long-term repayment issues.
All borrowers being brought current effective March 13, 2020, means all borrowers will reenter repayment in May 2022. This also makes it likely that a larger number of borrowers will become delinquent at the same time whether it’s because they can’t afford it, don’t know how to start repayment or don’t realize they have loans at all. Also, with the economic changes and using natural disaster trending data, there is typically a higher than normal delinquency rate following a disaster.
How the CDR Works
Federal student loan borrowers typically 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, they will default on their student loans. Default rates for a federal fiscal year encompass the cohort of borrowers who entered repayment during that year. The U.S. Department of Education (ED) annually calculates the percentage of borrowers who default for each college that has participated in the federal student loan program.
ED has calculated the Cohort Default Rate or CDR 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 also known as “three-year” CDRs.
CDR Calculation
The numerator includes the borrowers in the cohort that hat defaulted during the monitoring period. The fewer students that defaulted during the monitoring period the lower the rate will be. CDRs determine whether an institution’s student borrowers are successful at repaying federal student loans.
A cohort is a group of federal Direct and Stafford loan borrowers who enter repayment within a given federal fiscal year. The CDR is the percentage of borrowers in an institution’s cohort who default within the next three years after entering repayment.
The denominator is built from those students who enter repayment between October 1 and September 30 but then can default for up to three years after the year the cohort began.
Try the Cohort Year Impact Tool
This tool displays the amount of time that has expired versus the amount of time still remaining within each cohort year. It’s important to understand the ability to impact your school’s cohort default rate and that it is directly related to the amount of time remaining within each cohort year to work the delinquent accounts.
Dangers of a High CDR
The Cohort Default Rate is a mandate of the federal Higher Education Act stating if a higher education institution has too many former students defaulting on their federal loans, it can no longer be eligible to receive taxpayer-funded student grants and loans. The longer the rate remains high, the less federal support they will be able to offer their students.
School Requirements
A school with a single-year CDR of 30 percent or greater is required to establish a default prevention task force. The task force must develop a default prevention plan that includes measurable objectives designed to lower the school’s CDR. The plan must be submitted to the U.S. Department of Education. Schools with CDRs of 30 percent or greater for two consecutive years must revise their plans to implement additional measures and could also be subject to provisional certification.
Sanctions
A school with three consecutive official CDRs of 30 percent or over (without a successful appeal) will lose eligibility to participate in the Federal Direct Loan program and the Federal Pell Grant program.
If the official three-year CDR or any succeeding year’s rate exceeds 40 percent, without a successful appeal, the school will lose eligibility to participate in the Direct Loan program. The school will, however, retain eligibility to participate within the Federal Pell Grant program.
Disbursement Privileges
Beginning with loans made on or after October 1, 2011, if a school’s official CDR is less than 15 percent for either the two-year or three-year CDR calculations, for the three most consecutive years, the school may deliver loan funds in a single installment if the loan is made for a single term in a standard term-based program. The same applies to nonstandard, term-based programs when the term is no longer than four months.
Additionally, the school is not required to delay delivery of Stafford loan funds to first-year students who are first-time borrowers if the school’s three most consecutive official CDRs are less than 15 percent.
Reminder: If a borrower defaults on their Federal Stafford loans and later consolidates the defaulted loans, the borrower is still included in the cohort fiscal years when the borrower entered repayment on the underlying loans. The borrower is still considered to be in default for the purpose of calculating the school’s cohort default rate.
Key Impacts of CARES Act Expiration
The CARES Act was a necessary and positive action to help students and families through this unprecedented time. When student loan repayment suspension ends, it will set up an unusual set of challenges for students and the Financial Aid Office. This article outlines eight overlying potential challenges as they relate to students and financial aid offices. As a reminder, FFEL Loans and private loans held by lenders are not included in these changes.
- All delinquent borrowers, as of March 13, 2020, were brought current and will be kept current until the suspension expires. Everyone not making payments before March 13 were brought current without having to do anything. Some of these borrowers may have been on the verge of default and may not even know their loans are now current. Once the suspension expires, they will all reenter repayment at roughly the same time. For those that were on the edge of default, it will have been more than a year since they have done anything on their student loans.
- Some borrowers were in a suspended status such as a deferment or forbearance. These borrowers started that suspension before March 13, 2020, and should have come out of that status before the end of the suspension. Since the servicers are ensuring that no borrower goes beyond 31 days delinquent, these borrowers may forget they had payments coming due.
With the provisions of the CARES Act, these borrowers may not be engaged until after the suspension expires.
- Massive job loss for both student borrowers and parents. It is likely there will be more borrowers unable to start repayment. The CARES Act is providing temporary relief, but borrowers will need to determine a repayment plan option that fits within their budget once the Act expires.
- Increased number of borrowers renewing IDRs at the same time. Under guidance from the United States Department of Education, IDR plans that expire after March 13, 2020, but before the Act expiration will automatically have their renewal deadline extended. This could be for up to six months after the original expiration or only through the Act expiration.
- Based on previous experience with natural disasters, it is predicted that when repayment resumes, there will be an influx of delinquent borrowers. These borrowers will be more challenging to resolve because all borrowers who could not, or chose not to, make payments, will reenter repayment at the same time. Restarting all at once will likely result in a large number of borrowers becoming 60 days delinquent at the same time creating a larger number of borrowers requiring repayment guidance at once.
- Many borrowers are in between their repayment right now, but in the traditional sense, the suspension also impacts students who were in their grace period. Students that dropped below half-time after December 1, 2021, will not have an extension in their grace period and may be confused as to when they start paying. Without guidance, these students may not even know where to start with their financial situation that has been fluid in the last few months. Those who’s grace started before December 1, 2021, will have some delay, but still may fall through the cracks due to having barely started the process before it was put on hold again. Alternatively, as borrowers exit grace periods or education-related deferments, they may briefly enter repayment before being transitioned to the CARES Act mandatory administrative forbearance. This is also a challenge overall since the resume date is between semesters and each servicer will determine when payments should begin.
- Falling behind on student loan repayments has a lasting impact on students. Default can wreck their credit and make them ineligible to receive additional student aid. Even worse, students can end up with garnished wages or even have their tax refund withheld. Students who are struggling now will have an even tougher hill to climb as their debt compounds with possible collection fees, increasing interest or being sued for the entire amount at once.
- The suspension may have created a false sense of security. As you look down the road, diligence needs to be taken to prepare for long-term repayment issues. The 2018 and 2019 cohort years will be impacted significantly by the suspension of payments. Since the 2020 cohort cannot default prior to September 30, 2022 the 2020 CDR will be zero. For 2021, only 47% of the cohort year will remain, so it will also be impacted. In 2022, if repayment resumes in May 2022, 80 percent of the cohort year will remain moving the trend to a more “normal” state.
While suspending student loans was a relief to many students and schools alike, returning to repayment in a much different atmosphere than when it was suspended serves many challenges in understanding the impact and how to return to successful repayment habits. Understanding these challenges now and planning for what’s ahead will help you manage the impact to protect your students and your school.
How do I prepare?
Stay in touch throughout this process. It will be far easier for student borrowers to work through issues they have during this slower time than when everyone starts back after May 2022. If borrowers can make payments now, the zero interest rate can help reduce their principle. If they can’t make payments, this is a great time to renew or enroll for an Income-Driven Repayment (IDR) plan. These plans can be changed when income changes significantly.
Consider the timing. Knowing where your borrowers are in the borrowing lifecycle is key. Though the CARES Act has many resuming repayment at the same time, also consider where your students are in their Grace Period. Their timing may have been extended or there may be no change at all if they dropped below half time in early December 2021.
Offer student borrowers resources. Help prepare your borrowers for the next step with relevant resources and access to experts. Reminders, checklists, timelines, and even some information on general money management can go a long way to empowering students to take the steps they need for repayment success. See the Exit Counseling & Repayment Toolkit.
We are all in this together – patience and empathy will be key. Many times with personal hardship, financial hardship follows so even the simplest of questions might be the first question.
An empathetically fresh ear to each borrower’s concerns will help get to the root of the information you need to determine next steps in counseling and recommendations.
Students No Longer Hid From Debt
Blue Ridge Community College needed to lower its higher student loan default rate but its limited staff size prevented them from doing so. The financial aid team knew an outsourced solution would help students pay back debt and relieve their workload. Read more
We Can Help
Inceptia has student advocate counselors ready to answer student borrower questions through our Knowl website, chat and a simple telephone call. We will be there to help them prepare for the next step, so their student loans are one less concern.
Early engagement equals a better outcome and we can help you keep in contact with your student borrowers through our outreach programs that span the student borrower lifecycle. Proactive outreach promotes successful outcomes, extends personal contact, empowers borrowers with the information they need to help them make better financial decisions for their future. Our outreach includes, email, phone and text messages when possible with a complete communication plan at the time it matters most.
Return to Repayment Outreach: Proactive outreach to borrowers to remind them of resuming repayments and determining if there are any additional challenges will put them on the right track for successfully fulfilling their repayment obligations without falling behind.
Grace Counseling Outreach: Connect with borrowers about the repayment process to launch a successful financial future. Hear a call sample.
Repayment Counseling Outreach: Guide your students back to successful repayment and improve your school’s default rate. Hear a call sample.
Early Student Connection is Key
The CDR at Metropolitan Community College had been climbing. The college knew their exiting students didn’t have the information they needed to successfully enter repayment, but staff simply didn’t have the extra bandwidth for more outreach. MCC needed a partner who could support guiding students toward financial empowerment. Read more.
Connect with Us
To learn more about our Student Outreach Programs, visit Inceptia.org or contact your business development representative.
