Cohort default rate

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A cohort default rate is the percentage of a school's borrowers in the US who enter repayment on certain loans during a federal fiscal year (October 1 to September 30) and default prior to the end of the next one to two fiscal years.[1] The United States Department of Education (ED) releases official cohort default rates once per year.[2]

History of the cohort default rate[edit]

The cohort default rate was initiated in the late 1980s as a way of drawing attention to institutions that were thought to be preying on low-income students who might have trouble re-paying their loans.[3]

There had been a burst of trade schools in cities with large minority populations and low-income residents who tried to build enrollment by encouraging academically under-qualified students to apply for loans that they would be unlikely to be able to repay, especially if they received a substandard education.

The cohort default rate plan was that institutions with abnormally high default rates would be identified and held accountable for their actions. These institutions would lose access to federal grants and loans after having a cohort default rate that exceeded the national average by 30% for three years, or 40% in one year. The goal was that fraudulent schools would be weeded out and all institutions would be forced to look at student education debt more seriously.

Problems with the cohort default rate[edit]

The idea worked at first, as hundreds of illegitimate trade schools closed. However, some college leaders argued that default rate provisions were endangering legitimate colleges that served low-income students who needed loans to pay for their education.

Other criticisms have been raised as well. The cohort default rate only tracks a portion of borrowers –- those who default within the first two years of repayment.[4]

Changes[edit]

Changes have been made to address certain criticisms. In 1998, the United States Congress decided to extend the amount of time (from 180 to 270 days) before loans were considered to be in default. Additionally, it takes the government 90 days to pay the insurance claim. That means it takes roughly a full year for a loan to be considered in default, and that’s not including the 6-month grace period before repayment begins.[5]

Then, starting in 2005, Congress began advising colleges to compare the ED’s cohort default rates for their schools with their own records in order to ensure consistency. Schools that find inconsistencies between cohort-default-rate data and their own can challenge the ED’s findings.[6]

Default Prevention Initiatives[edit]

Several new initiatives have arisen to combat high student loan default rates, including an outreach effort by the Department of Education to borrowers struggling to repay their loans,[7] and an interactive financial education platform developed by iGrad, a web-based financial literacy and student loan educator.[8]

See also[edit]

References[edit]

Further reading[edit]