Dear Colleague Letter GEN-14-03 provides important information about the consequences of high cohort default rates. In general, the sanctions for an institution with a high cohort default rate are:
- Cohort default rate of greater than 40 percent for any one year – Institution loses eligibility to participate in the Direct Loan Program.
- Cohort default rate of 30 percent or more for any one year – Institution must create a default prevention taskforce that will develop and implement a plan to address the institution’s high cohort default rate. That plan must be submitted to the Department for review.
- Cohort default rates of 30 percent or more for two consecutive years – Institution must submit to the Department a revised default prevention plan and may be placed on provisional certification [see 34 CFR 668.13 for the impact to an institution of being placed on provisional certification].
- Cohort default rates of 30 percent or more for the three consecutive years – Institution loses eligibility to participate in both the Direct Loan Program and in the Federal Pell Grant Program.
IMPORTANT NOTE: An institution’s decision to stop participating in the Direct Loan Program does not eliminate the possibility that it will lose eligibility to participate in the Pell Grant Program. This is because the calculation of institutional cohort default rates and possible consequences of high cohort default rates continue until there are no more of the institution’s former students entering repayment on their Direct Loan or FFEL loans taken for attendance at the institution. This could be for a considerable amount of time if the last cohort of the institution’s borrowers continues in an in-school status (either at the same institution or at another institution) for several years. However, as the number of borrowers in a cohort decreases, institutions might qualify to appeal loss of eligibility under the Average Rates Appeal or the Thirty-or-Fewer Borrowers Appeal.
Challenges, Adjustments, and Appeals of Cohort Default Rates and Sanctions
The HEA and the regulations include provisions that allow an institution to submit challenges to the data used in the calculation of its draft cohort default rate or to request an adjustment to its official cohort default rate. There are also a number of appeals to an institution’s possible loss of Direct Loan and Pell Grant eligibility from sanctions due to high cohort default rates.
Attachment A of this Dear Colleague letter provides a summary of each of the cohort default rate challenges, requests for adjustments, and appeals available to institutions. However, it is very important that institutions review the detailed information provided in the Department’s Cohort Default Rate Guide, available on the Information for Financial Aid Professionals (IFAP) website at www.ifap.ed.gov/DefaultManagement/finalcdrg.html for official descriptions, requirements, and submission deadlines, as the procedural requirements are strictly regulated under subpart N of Part 668 of the Student Assistance General Provisions regulations.
Following is a discussion of the Participation Rate Index Challenge and the Participation Rate Index Appeal because USDE has found that they can provide sanction relief to institutions with low percentages of their students taking out Federal student loans. The Department believes that the availability of the Participation Rate Index Challenge and Participation Rate Index Appeal could mitigate some institutions’ consideration of withdrawing from the Direct Loan Program due to sanctions triggered by high cohort default rates.
An institution may avoid a sanction due to high cohort default rates if it satisfies the requirements for a Participation Rate Index Challenge or a Participation Rate Index Appeal for any of the years supporting the sanction, generally three consecutive years. Except for the timing for submitting the challenge or appeal, a Participation Rate Index Challenge and a Participation Rate Index Appeal are the same process. A Participation Rate Index Challenge can be filed upon the institution receiving a draft cohort default rate that, along with its official rates from the two prior years, could result in a loss of eligibility upon issuance of the official rate.
In contrast, a Participation Rate Index Appeal can be filed upon the institution receiving an official cohort default rate that, along with its official rates from the two prior years, could result in a loss of eligibility.
To satisfy the requirements for either a Participation Rate Index Challenge or a Participation Rate Index Appeal, the institution must have a participation rate index at or below a mandated minimum. A participation rate index is the product of multiplying the institution’s cohort default rate by its Federal student loan participation percentage. Generally, an institution’s Federal student loan participation percentage is the percentage of the institution’s students who were enrolled half-time or more who received a Direct or FFEL loan. The regulations provide institutions with flexibility in determining the timeframe to use for the calculation of its Federal student loan participation percentage.
The participation rate index minimums are 0.0625 for a possible loss of eligibility due to three years of cohort default rates of 30 percent or more and 0.0832 for a possible loss of eligibility due to one year of a cohort default rate of greater than 40 percent. An institution that is successful in its Participation Rate Challenge for a specific year’s cohort default rate will not need to submit a Participation Rate Appeal for the same year’s rate to address a possible loss of eligibility when official rates are released later in the year.
As a guide, an institution with a cohort default rate of between 30 percent and 35 percent would satisfy the Participation Rate Index Challenge if its Federal student loan participation percentage was 17.8 percent or less. An institution with a default rate of between 35 percent and 40 percent would satisfy the Participation Rate Index Challenge if its Federal student loan participation percentage was 15.6 percent or less. Attachment B to this letter is a chart providing the maximum Federal student loan participation percentage for other cohort default rates.
Please be sure to review this Dear Colleague Letter in its entirety as it contains valuable information. You can access the letter and the attachments at http://www.ifap.ed.gov/dpcletters/GEN1403.html