Cohort default rates are more than just numbers to a college and university.
These default rates can harm an institution’s reputation and even bring on federal sanctions, which can make it harder to recruit new students and serve its existing ones.
And yet, when an institution is able to manage its CDR effectively, or even below certain thresholds, it can lead to demonstrating your institution’s value to prospective students, alumni, accreditors and even college rating publishers.
In this ultimate guide to cohort default rates, we provide an introduction to CDRs, the life stages a student loan takes for borrowers, ideas for better communicating your CDR and default prevention strategy, as well as some tips to keeping your institution’s default rate down.
Ready? Let’s dive in.
Here is how the U.S. Department of Education defines cohort default rates:
“A cohort default rate is the percentage of a school’s borrowers who enter repayment on certain Federal Family Education Loan (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan) Program loans during a particular federal fiscal year (FY), October 1 to September 30, and default or meet other specified conditions prior to the end of the second following fiscal year.”
Here’s a visual representation of how an institution’s cohort default rate is calculated:
While that definition is true, it only pertains to institutions with 30 or more borrowers.
For any institution with 29 or fewer borrowers entering repayment during a fiscal year, their cohort default rates are an “average rate” based on borrowers entering repayment over a three-year period.
Once per year, the U.S. Department of Education releases official cohort default rates to all institutions. This typically occurs in the fall by the end of September, one year following the end of the cohort period.
The U.S. Department of Education releases a draft cohort default rate typically each spring to institutions as well. These are unofficial rates, and the official rates are published to the general public in the fall through a searchable database.
The data covered the 2014 fiscal year cohort was published in September 2017. Overall borrowing is down 3 percent from the prior year. Public institutions remain flat, with rates at 11.3 percent, while the private sector experienced an increase for the third year in a row. The proprietary sector had an increase of 0.5 percentage points.
Thirty-four states saw more than half of all institutions experience an increase in default rates; however, only four states experienced an overall increase of one percentage point or more, and 12 states saw an increase by half a percentage point or more. Investment in student success products, grace counseling and default prevention efforts would result in better borrower outcomes.
Many borrowers will default within the 3-year monitoring period, which negatively affects cohort default rates.
Technically, a federal loan is in default on the 271st day of delinquency. However, the borrower is added to the CDR numerator:
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There are many benefits for institutions that have several consecutive years of low cohort default rates:
The school may disburse loan funds in a single installment if the loan is made for a single term in a standard term-based program or non-standard, term-based program when the term is no longer than four months.
The school is not required to delay disbursement of Direct Subsidized or Unsubsidized loan funds to first-year students who are first-time borrowers.
Consequently, there are some significant sanctions an institution can encounter for having consistently high cohort default rates:
A school with a single-year official, published CDR of 30 percent or more must establish a default prevention task force. The task force must define and implement a default prevention plan that identifies the factors causing the CDR to exceed the threshold and includes measurable objectives and action plans designed to lower the school’s CDR.
The school must submit the plan directly to the U.S. Department of Education. A school with a CDR of 30 percent or more for two consecutive years must — in the second year — revise the default prevention plan to implement additional measures. The school may be subject to provisional certification.
A school may lose program eligibility based on its official CDR under either of the following conditions:
In the past, we’ve highlighted the importance of borrower outreach and counseling while borrowers are in their grace period, the six-month period between leaving school and entering repayment. This time frame is critical, especially for borrowers who have withdrawn and don’t complete exit counseling. Exit counseling will help ensure they understand the terms of their federal student loan(s) and the options available upon repayment, such as Income Driven Repayment.
Many institutions struggle with understanding the critical nature and timing of cohort development. The chart below illustrates some of this complexity:
The 2015 draft rates were recently released, the 2016 cohort is only a few months away from closing, and believe it or not, the 2019 cohort is beginning to form. Taking a proactive approach to default prevention should occur at the time a loan is disbursed, with entrance counseling and other tools, and continue when a borrower moves beyond the purview of the institution, through grace and delinquency outreach.
We’ll say it again this year: If you only focus on one or two cohorts, default risks increase with this reactive approach, and institutions will fail to engage borrowers before a problem exists. Student Connections provides solutions that enable holistic CDR management that is both sustainable and comprehensive.
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When official cohort default rates are published, here are some important tips to remember no matter what type of institution you are a part of:
1) Understand that it takes time to impact your default rate.
Because of the time frames associated with three-year rates, it is almost impossible to have an immediate impact. For example, the CY15 cohort is closed. You can see here how many dates are left to work the CY16, CY17, and CY18 cohorts. That’s why it is important to maintain your level of effort even if you see rates drop in a particular year.
2) Remember that if you and/or your service provider are just starting to address a cohort year, there may not be an immediate impact.
As delinquencies age, it becomes more difficult to track down borrowers to provide them with the options they could use to resolve their payment problems.
3) The best thing you can do is proactive outreach to grace borrowers.
Based on our data from Borrower Connect, borrowers who receive grace period counseling from our student success counselors are less likely to end up delinquent. Grace counseling is another example of investing resources now that you won’t see reflected in your cohort rates for two to three years.
4) The best results are gained from a joint effort between your school and your service provider.
We often recommend “teaming up to prevent defaults,” and it turns out to be very good advice. Schools that utilize the full functionality of Borrower Connect – phone, mail and email campaigns every month, along with our calls and emails – are achieving greater results. That joint effort includes monthly meetings with an account manager to talk about strategies, results and brainstorming new ideas.
5) In order to achieve your goals, your institution must be willing to dedicate resources.
If you elect self-service, you need to allocate funds for personnel, equipment and software. If you are contracting with us or another service provider, you need to have the budget that will support the level of effort you want to maintain.
6) Don’t dismiss the effectiveness of a really engaging exit counseling session.
Schools that actively engage students in a comprehensive counseling strategy also see lower delinquency rates.
7) Finally, take all of these things into account when setting your CDR reduction goal.
We’d all love to see a big drop in CDR year over year, but the factors of time, budget and effort will all impact whether or not your reach your goal.
|» Get The Guide: Creating a Student Loan Repayment Strategy for Financial Aid Teams|
We have come up with nine proactive steps toward preventing student loan default that can make a difference in lowering cohort default rates.
1) Communicate with borrowers at key decision points.
During application and the first 90 days of a student’s life cycle, find opportunities to provide helpful debt management advice that can be a foundation throughout students’ educational careers. While they are in school, continue to share messages related to default prevention and student retention.
Final year and program completion is the stage to help them understand their student loan repayment options and to connect them to assistance with job searches. Post-graduation, reach out early and follow up frequently to establish connections with borrowers.
2) Introduce financial wellness programs.
Providing your students with financial education can help keep them on track to successful repayment. But your time is limited, so don’t hesitate to get creative, involve the entire campus, and incorporate financial education into existing programs and processes.
3) Communicate across campus.
The Department of Education recommends a campus-wide approach to default prevention. Collaborate on activities and share data with your colleagues in the campus business office, student records, academic advising and enrollment management — to name a few — to promote default prevention and student success.
Involve your institution’s upper administration in default prevention too. Make sure officials understand the potential impact of the three-year cohort default rate calculation as well as your school’s default rate results and plans for default prevention.
4) Focus on retention and student success.
The Department studied its student loan portfolio and found that more than 70 percent of students who defaulted on their federal education loans left school before completing their programs. Many schools dedicate staff to student retention activities, in an effort to boost student and school success and reduce default rates.
But if your school’s resources are limited, consider how you can combine default prevention and retention activities. Encourage your institution to create a cross-departmental team that addresses default prevention and student retention issues. Find ways to promote student success throughout the educational process.
5) Employ early identification and counseling for at-risk students.
Don’t rely on assumptions about the characteristics of borrowers who are most likely to default on their student loans. Analyze data about your school’s borrowers from sources such as school records, the National Student Loan Data System, and your federal Loan Record Detail Report to determine who’s really defaulting.
Reach out to the students you’ve determined are most likely to default. Provide them with the information they need, before they know they need it, and keep them connected with your institution.
6) Use timely and accurate enrollment reporting.
This practice not only is a regulatory requirement, but it also places your borrowers in the correct cohorts for default rate calculations.
Proper enrollment reporting also helps ensure that your borrowers who are in school continue to qualify for deferment, and that those who leave school enter their grace and repayment periods on the correct dates. And loan servicers rely on accurate enrollment information in contacting your borrowers at the appropriate times in the student loan cycle.
7) Review NSLDS and repayment information.
If you look at your reports from NSLDS on a regular basis, then you’ll be a step ahead when you receive draft cohort default rate data each year. Scrubbing your NSLDS data along the way will make it less likely that you’ll need to challenge that draft rate data, and, if you do, the process will be easier.
Keeping tabs on your borrowers’ repayment status also assists you as you provide them with timely messages to help them avoid default. For more information, see Chapter 3.2 of the Federal Student Aid Cohort Default Rate Guide.
8) Maintain contact with former students.
Don’t wait until the last minute to establish your school as a borrower’s trusted adviser regarding student loan repayment. The best approach is to reach out to borrowers from the time they enroll in your school. Then continue connecting with borrowers after they leave school and enter their grace period.
If you build a relationship with students and borrowers early, they’ll be more likely to respond to your attempts to assist if they encounter repayment problems.
Staying in touch also gives you an opportunity to update borrowers’ contact information on a regular basis, and to track the success of your efforts at different stages in borrowers’ loan repayment.
9) Use data to guide your default prevention efforts.
A targeted approach to default prevention provides different levels of outreach to segments of borrowers according to their default risk. In other words, it gives you a bigger bang for your buck.
Use borrower data like that found in the NSLDS School Portfolio file (SCHPR1), borrower demographic files in your student information system, servicer files and other sources that can help you determine who has defaulted in the past. Customize your default prevention strategy according to your cohort default rate goals, focusing on the borrowers you’ve identified as being most at risk of defaulting.
Many institutions used to invest heavily in default aversion efforts and have since shifted their focus from default prevention to other important areas affecting student success. In some cases, cohort default rates have leveled off and will continue at current rates while others may begin to increase with less-focused efforts on default trends.
As an example, one institution recently began working with the Student Connections outreach team to manage their default rates following in-house staff reductions and budget cuts in the last year. They had seen significant decreases in CDRs from prior years; however, reducing those efforts has impacted FY 2015 rates, now trending up to five points higher than prior years. This is a prime example of how consistent investment of resources in CDR management is critical to long-term, sustainable results in default prevention.
Whether you do that in house or by outsourcing all or part of your cohort management and borrower counseling functions with a solution like Borrower Connect, only a consistent approach will provide sustainable, long-term benefits for your future cohort default rates. No matter your solution, having a way to keep a pulse-check on your active cohorts is critical to identifying current and future needs to continue positive impacts on your default rates.
Are your school’s default prevention efforts strong enough?