Washington, D.C. – After a rough summer for
the student loan industry, the Department of Education,
Lenders,
Guarantors and Institutions all had something to cheer
about when the Department released the 2005 Cohort
Default Rates (CDRs).
The rates showed that only 4.6
percent of
borrowers who began repaying their loans between October
1, 2004 and
September 20, 2005 had defaulted on their loans by
September 2006. The rate had dropped half a percentage
point from
5.1 percent the previous year and was only .1 percentage
point higher than the historically low rate announced
in 2005.
Guaranty agencies around the country issued
press releases touting the low number as well as
the low numbers at
their agency. American Student Assistance (ASA) had
a 1.5 percent CDR in 2005, the lowest of any of the
35
guaranty agencies in the country.
“We are proud of this accomplishment, especially
of our sustained ability to continue to set new default
prevention
standards year after year,” said Paul Combe,
ASA president and CEO. “These results show
that ASA's borrower focused business model is good
public
policy
and makes ASA stand out from the pack when it comes
to helping borrowers successfully mange education
debt.”
However, some were not that impressed
by the low default percentages posted this year.
Their central
complaint
is that the Cohort Default Rate does not provide
an accurate indication of students’ success
in repaying their loans. Alan Collinge, president
of Student Loan
Justice.Org,
an advocacy group for borrowers, argues that the
CDR only represents a slim slice of the total default
pie.
“The cohort rate is a silly metric that only counts
the loans that default in the fiscal year after the
fiscal
year in which the borrowers entered repayment,” Collinge
says. “The true default rate is roughly triple
this number - between 12 and 15 percent, depending
on the type of loan.”
Collinge’s argument
is nothing new. In December 2003 the Department’s
Office of the Inspector General released a report,
concluding that the CDRs “do
not appear to provide decision-makers with sufficient
information on defaults in the Title IV loan programs.”
The
Department noted that the 2005 low default rates
are a result of a record number of loan consolidations,
as well as forbearance and deferments granted to
victims of hurricanes Katrina and Rita, but it remains
unknown
how well these borrowers will be able to avoid default
in the coming years.
The skepticism about the CDR
as an accurate gauge of students’ ability to
avoid default raises the question: Why is this statistic
used as the standard
for measuring
default and to determine what lenders and institutions
are eligible to participate in the Title IV programs?
The
Department was concerned in 1987 that increasing
student loan default costs were undermining public
confidence in the loan programs and instituted
several measures
to reduce defaults. One of these measures was regulations
issued to hold schools responsible for keeping
default rates of borrowers who attended their institutions
below a specified threshold for the first two years
of repayment.
Then Congress changed the definition
of default when they reauthorized the Higher Education
Act
(HEA)
in 1998. The 1998 HEA bill changed the definition
of default
from
a 180-day delinquency to a 270-day delinquency.
Under
the current 270-day definition of default, it takes
about 420 days for a borrower to be
considered in default.
Since 420 days is more than a year, it is possible
for some borrowers who enter repayment late
in a CDR
year
to make no payments and still not be considered
in default for that cohort default year, according
to
the inspector
general’s report. Under the 180-day delinquency
definition, this could not occur because the
delinquency period was less than a year, ensuring
that all borrowers
who did not make any payments were considered
in default during the appropriate cohort year.
When borrowers default outside of the cohort
default year, it can skew the cohort default
rate even
more because these borrowers are considered
in the repayment
base
but not in the default base, inflating a low
default rate more than if the borrower was
never considered
at all.
Why would Congress make this change?
According to the
inspector general’s 2003 report,
the change was one of several savings measures
enacted to offset the cost associated with changing
the formula
for lenders’ student loan interest
subsidies. The Congressional Budget Office
estimated that
the definition
change would reduce the outlays associated
with defaulted loans by $880 million for
the period
1998 to 2008.
Many (including the Office
of the Inspector General) have argued
that the Department
should track
a life of loan cohort default rate to
supplement or replace
the
current CDR in order to provide a more
accurate portrait of student loan default. ASA’s
Vice President of Borrower Services Michael
Ryan said ASA agrees that the cohort
default rate alone
is not a sufficient indicator for evaluating
defaults, and that the company supports
tracking lifetime defaults.
While the current CDR may not be a perfect
measure of default, it still provides a
glimpse of the
majority of students that enter repayment
in a cohort year.
The
fact that the CDR has dropped from 22.4
percent in 1990 to 4.6 percent today should
be a
feather in
the cap of
all those who work hard to prevent borrowers
from defaulting.
“The cohort default rate calculation does have
some value in helping assess effectiveness in preventing
defaults right out of the box,” Ryan said. “Some
measure of how early-stage repayers are
doing has value, as this
is the most critical juncture in getting
borrowers on track successfully. Statistics show that borrowers
who
make monthly payments on time in the first
year of repayment are much less likely to default
later on.”
|
