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AwardYear: 1997-1998 EnterChapterNo: 6 EnterChapterTitle: Federal Perkins Loan Program SectionNumber: 8 SectionTitle: Default PageNumbers: 87-100 [[Definition of default]] Default in the Federal Perkins Loan Program is defined as "the failure of a borrower to make an installment payment when due or to comply with other terms of the promissory note or written repayment agreement." Schools are required to comply with the due diligence regulations in regard to notifying the borrower about payments due or overdue, billing procedures, and collection procedures before resorting to litigation. Due diligence procedures are discussed in Sections 6 and 7 of this chapter. [[Report to credit bureau]] A school must report a defaulted loan account to a national credit bureau organization with which the U.S. Department of Education has an agreement. A school must also report any change in account status to the same national credit bureau to which it originally reported the default, according to the reporting procedures of the credit bureau. If the school receives an inquiry from any credit bureau about the information reported on the loan, the school must respond to the inquiry within one month of its receipt. The debtor has the right to appeal the accuracy and validity of information reported to the credit bureau. For more information about reporting Perkins Loans or National Direct Student Loans (NDSLs) to a national credit bureau, see Section 10, "Credit Bureau Reporting." A borrower who has made "satisfactory arrangements to repay" a defaulted loan reestablishes his or her eligibility to apply for federal student aid. However, the loan is still considered to be in default and will continue to be reported as defaulted to a national credit bureau organization with which the Department has an agreement. The term "satisfactory arrangements to repay" is defined as the "establishment of a new written repayment agreement and the making of one payment each month for six consecutive months." If a borrower has made satisfactory arrangements to repay a defaulted loan prior to the end of the cohort period and if the loan entered repayment during the cohort period, the loan is not included as a defaulted loan in calculating the school's cohort default rate. [[Default Reduction Assistance Project (DRAP)--"Dear Colleague" Letter CB-94-7]] To assist schools in bringing defaulted borrowers into repayment, the Department has established the Default Reduction Assistance Project (DRAP). Under DRAP, a school can request that the Department send a borrower any of three letters designed to warn the student of the seriousness of default. The Department provides these services at no cost to the school. Participation in DRAP is voluntary. General questions about DRAP should be directed to the Campus-Based Programs Systems Division. The telephone number is (202) 708- 6726. As DRAP is intended to get the borrower back into repayment BEFORE the account goes to a collection firm, this service should NOT be requested once a collection agency is involved. DRAP service is usually provided during the 30-day period during which a school is awaiting response to the final demand letter. [[SkipTracing and the Safeguard Activity Report--CB-96-15 (LD), July 1996]] Although schools are no longer required to use the IRS/ED skip- tracing service for carrying out the due diligence provisions of the Perkins Loan Program, the Department strongly encourages schools to continue to use this service. The IRS/ED skip-tracing service is one of the most powerful tools available to schools for locating defaulted borrowers. In order to maintain eligibility to participate in the in the IRS/ED Skiptracing Service, each school that participates must submit an annual Safeguard Activity Report in accordance with IRS Publication 1075. If a school fails to submit the report, it will lose its eligibility to participate in the service. "Dear Colleague" letter CB-96-15 (LD), dated July 1996, included instructions for completing the report that was due by August 31, 1996. The reports help ensure that procedures are established and utilized to safeguard the names and addresses of defaulted borrowers under the Perkins Loan Program. General questions should be directed to the Department's Program Systems Service, Campus-Based Programs Systems Division. The telephone number is (202) 708-6726. COMPROMISE OF REPAYMENT OF DEFAULTED LOAN To encourage repayment, a school may compromise on the repayment of a defaulted loan if the school has fully complied with all due diligence requirements discussed in Section 6 of this chapter and if the borrower pays in a single lump-sum payment - 90% of the outstanding principal balance on the loan; - the interest due on the loan; and - any collection fees due on the loan. The federal share of the compromise repayment must bear the same relation to the school's share of the compromise repayment as the Federal Capital Contribution (FCC) bears to the Institutional Capital Contribution (ICC). PENALTY FOR SCHOOLS WITH HIGH COHORT DEFAULT RATES If a school's cohort default rate meets the following levels, a default penalty is imposed on the school, as described below: - If a school's cohort default rate equals or exceeds 15%, it must establish a default reduction plan; - If the school's cohort default rate is greater than 15%, it may not participate in the Expanded Lending Option (ELO); - If the school's cohort default rate equals or exceeds 20% but is less than 25%, the school's FCC will be reduced by 10%; - If the school's cohort default rate equals or exceeds 25% but is less than 30%, the school's FCC will be reduced by 30%; - If the school's cohort default rate equals or exceeds 30%, the school's FCC will be reduced to zero. CALCULATING A SCHOOL'S COHORT DEFAULT RATE A school's cohort default rate is calculated for a particular year based on information the school provides on the annual Fiscal Operations Report. [[Definition of "cohort default rate”]] The term "cohort default rate" means (for any award year in which 30 or more current and former students at the school enter repayment on a loan received for attendance at that school) the percentage of those current and former students who enter repayment in that award year on the loans received for attendance at that school and who default before the end of the following award year. For any award year in which LESS than 30 current and former students at the school enter repayment on a loan received at the school, "cohort default rate" means the percentage of those current and former students who entered repayment on loans received for attendance at that school in any of the THREE most recent award years and who defaulted on those loans before the end of the award year immediately following the year in which they entered repayment. Each school's 1997-98 Fiscal Operations Report and Application to Participate (FISAP) lists the cohort default rate that affects the school for the 1997-98 award year. We will refer to that rate as the school's current cohort default rate. This rate (for schools with at least 30 borrowers entering repayment each year) was calculated by computing the number of borrowers who entered repayment between July 1, 1994 and June 30, 1995. For purposes of the cohort default rate, a loan enters repayment only once in its life. This repayment begins the day after the end of the initial grace period or the day that the borrower waives his or her initial grace period. [[Denominator of formula]] The denominator in the calculation is the number of borrowers entering repayment during the specified award year (1994-95 for the 1997-98 FISAP). In calculating the default rate, each loan is attributed only to the school that made the loan. [[Numerator of formula]] The numerator in the calculation is the number of people in the denominator who were in default as of the end of the following award year. In calculating a school's current cohort default rate, the numerator is the number of people in the denominator who were in default at the end of the 1995-96 award year (June 30, 1996). For purposes of that calculation, as of June 30, 1996, a borrower must have been in default for at least 240 consecutive days for monthly payments or 270 consecutive days for other installments. Even if the school had paid off the loan, the borrower still had to be included in this calculation. However, borrowers who had made satisfactory arrangements to repay the loan could be excluded from the numerator. DEFAULTED LOANS INCLUDED IN A SCHOOL'S COHORT DEFAULT RATE The criteria listed below determine which defaulted loans must be included in the formula to determine a school's cohort default rate: - A borrower must be included in determining the school's cohort default rate if the borrower's default has persisted for at least 240 consecutive days for a loan repayable monthly or 270 consecutive days for a loan repayable quarterly.*1* This borrower must be included regardless of the loan's status on June 30 of the second year of the cohort period. - For example, if a borrower's loan is in default for at least 240/270 consecutive days and an authorized period of deferment begins after the 239th day past due, the loan would be counted as a default in the school's cohort default rate even if the loan is in a deferred status on June 30. Once the loan is 240/270 days past due, bringing it below 240/270 days past due or even bringing it current will not eliminate the loan from the cohort default rate. Because a borrower is not billed during an authorized period of deferment, the delinquency would not increase during the deferment. [[School makes payment]] - A loan is considered to still be in default if the school, its owner, agency, contractor, employee, or any other entity or individual affiliated with the school makes a payment to prevent the borrower from defaulting. [[Borrower pays loan in full]] - If a borrower pays a past-due loan in full, the loan will not be included in the school's cohort default rate. [[Satisfactory repayment arrangements]] - A loan that is in default but on which the borrower has made satisfactory repayment arrangements is NOT considered to be in default for the purpose of determining a school's cohort default rate. [[Borrower with loans from multiple schools]] - In the case of a student who has attended and borrowed at more than one school, the student and his or her subsequent repayÐment or default are attributed to the school where the student received the loan that entered repayment in the award year. [[Loan assigned to the Department]] - A defaulted loan that has been assigned to the Department is counted in determining a school's cohort default rate if the loan entered repayment during the appropriate time period. Assignments of loans to the Department no longer lower a school's default rate. In addition, the status of a loan that has been assigned to the Department is still considered in default until the loan is paid in full, even if the borrower has made satisfactory arrangements to repay the defaulted loan in order to qualify for additional aid from Student Financial Assistance (SFA) programs. [[Retroactive forbearance]] - A loan that is 24 days or more past due but on which the school has granted a retroactive forbearance (after providing the necessary documentation to the school) is considered to be in default only for the purpose of determining a school's cohort default rate. The loan is not considered to be in default for the purpose of determining the borrower's eligibility for additional SFA funds. RULES FOR CALCULATING THE NUMBER OF DAYS IN DEFAULT The following rules are used in calculating the number of days a loan has been in default. - The 240/270 consecutive days in default is determined by calculating the "age" of the account (that is, the number of consecutive days the oldest dollar is past due). - A payment that a borrower makes on a past-due loan is applied to the oldest dollars first, effectively reducing the past-due status. - For example, suppose a borrower's monthly payment amount is $50. The borrower has made no payments for 5 months, making the loan 150 days past due. The borrower then makes one $50 payment. The school applies the payment to cover the first month's payment that was overdue, reducing the loan's past-due status from 150 days to 120 days because the earliest past-due payment is now 4 months old. The calculation of the number of days overdue begins with the oldest dollar past due. - A loan on which a borrower is past due and on which the borrower makes an occasional payment but never becomes current could be counted as a defaulted loan for the cohort default rate calculation despite the occasional payments. Because the delinquency is not being cured, the oldest past-due dollar could eventually become 240 days past due, making the loan count in the cohort default rate calculation. However, if the borrower makes enough occasional payments to prevent the oldest past-due dollar from becoming 240 days old, the loan would not be included in the cohort default rate calculation. - For example, let's use the same scenario as the example above. The borrower's oldest dollar is 120 days past due. The borrower does not make any additional payments for 90 days, making the oldest dollar 210 days past due. The borrower then makes a $50 payment, reducing the past-due status to 180 days. Another 60 days elapse without the borrower making a payment, bringing the oldest dollar to 240 days past due. At that point, the loan would be counted in the school's cohort default rate even if subsequent payments reduce the past-due status to less than 240 days. - An exception to the 240/270-day threshold will be granted in a case where a borrower 1. would have qualified for a deferment for a period beginning prior to the loan hitting the 240/270-day threshold and 2. failed to file a request for the deferment in a timely manner. For such a borrower, the loan's past-due status would be adjusted to reflect the deferment period beginning date. However, note that the borrower would need to pay any past-due amounts that were due prior to the beginning of the authorized deferment periods, if the deferment period beginning date does not eliminate the loan's entire delinquency. - Using the earlier example, the oldest dollar of the loan is 240 days past due. The borrower files a request for a deferment based on the fact that he or she is attending school and the enrollment period began on the date that the loan became 90 days past due. The past-due status of the loan is reduced to 90 days, and the loan is given a deferment status. This loan is treated as if the 240-day threshold had never been reached. Therefore, it would not be counted in the school's cohort default rate. COHORT DEFAULT RATE FOR A SCHOOL WITH MORE THAN ONE LOCATION If a school has a branch or branches or has an additional location or locations, the school's cohort default rate applies to all branches and locations of the school as they exist on the first day of the award year for which the rate is calculated. The cohort default rate applies to all branches/locations of the school from the date the Department notifies the school of the rate until the Department notifies the school that the rate no longer applies. [[Change from branch to freestanding school]] If a school changes status from a branch of one school to a freestanding or independent school, the Department determines the cohort default rate based on the school's status as of July 1 of the award year for which the rate is being calculated. [[Cohort default rate of schools that merge]] If an independent school becomes a branch of another school or merges with another independent school, the Department determines the cohort default rate based on the combined number of students from both schools who enter repayment during the applicable award year and the combined number of students from both schools who default during the applicable award years. The new rate applies to the new consolidated school and all of its current locations. [[Branch moves to another school]] If a school changes status from a branch of one school to a branch of another school, the Department determines the cohort default rate based on the combined number of students from both schools who enter repayment during the applicable award year and the combined number of students from both schools who default during the applicable award years from both schools in their entirety. [[Ownership changes]] If a school has a change in ownership that results in a change in control, the Department determines the cohort default rate based on the combined number of students who enter repayment during the applicable award year and the combined number of students who default during the applicable award years at the school under both the old and new control. DEFAULT REDUCTION PLAN Any school with a cohort default rate that equals or exceeds 15% must establish and implement a plan designed to reduce defaults by its students in the future. The school must submit to the Department by December 31 of the calendar year in which the cohort default rate was calculated - a written description of the default reduction plan; - a statement indicating that the school agrees to comply with the required measures listed in the following paragraph; or - if the school already has a default reduction plan under the Federal Family Education Loan (FFEL) Program, a statement that the school agrees to apply that plan to the Perkins Loan Program. A school's default reduction plan must include the measures listed below and a description of the measures the school will take to reduce defaults. The school must explain how it plans to 1. revise admission policies and screening practices, consistent with applicable state law, to ensure that students enrolled in the institution, especially those who are not high school graduates or those who are in need of substantial remedial work, have a reasonable expectation of succeeding in their programs of study; 2. improve the availability and effectiveness of academic counseling and other support services to decrease withdrawal rates, including - providing academic counseling and other support services to students on a regular basis, at a time and location that is convenient for the students involved; - publicizing the availability of the academic counseling and other support services; - establishing procedures to identify academically high-risk students and schedule those students for immediate counseling services; and - maintaining records identifying those students who receive academic counseling; 3. attempt to reduce its withdrawal rate by conforming with its accrediting agency's standards of satisfactory progress and with those described in 34 CFR 668.34 and improving its curricula, facilities, materials, equipment, qualifications and size of faculty, and other aspects of its educational program in consultation with its academic accrediting agency; 4. increase the frequency of reviews of in-school status of borrowers to ensure the institution's prompt recognition of instances in which borrowers withdraw without notice to the institutionÑreviews must be conducted each month; 5. expand its job placement program for its students by - increasing contacts with local employers, counseling students in job search skills; - exploring with local employers the feasibility of establishing internship and cooperative education programs; - attempting to improve its job placement rate and licensing examination pass rate by improving its curricula, facilities, materials, equipment, qualifications and size of faculty, and other aspects of its educational program in consultation with the cognizant accrediting body; and - establishing a liaison for job information and placement assistance with the local office of the United States Employment Service and the Private Industry Council supported by the U.S. Department of Labor. 6. remind the borrower of the importance of the repayment obligation and of the consequences of default, and update the institution's records regarding the borrower's employer and employer's address as part of the contacts with the borrower under 34 CFR 674.42(b); 7. obtain from the borrower, at the time of a borrower's admission to the institution, information regarding references and family members beyond those provided on the loan application, in order to provide the institution or its agent with a variety of ways to locate a borrower who later relocates without notifying the institution; 8. explain to a prospective student that the student's dissatisfaction with, or nonreceipt of, the educational services being offered by the institution does not excuse the borrower from repayment of any Perkins Loan; 9. use a written test and intensive additional counseling for those borrowers who fail the test to ensure the borrower's comprehension of the terms and conditions of the loan including those described in 674.16 and 674.42(a) as part of the initial loan counseling and the exit interview; 10. during the exit interview provided to a borrower - explain the use by institutions of outside contractors to service and collect loans; - provide general information on budgeting of living expenses and other aspects of personal financial management; and - provide guidance on the preparation of correspondence to the borrower's institution or agent and completion of deferment and cancellation forms; 11. use available audio-visual materials such as videos and films to enhance the effectiveness of the initial and exit counseling; 12. conduct an annual comprehensive self-evaluation of its administration of the Title IV programs to identify institutional practices that should be modified to reduce defaults, and then implement those modifications; 13. delay loan disbursements to first-time borrowers for 30 days after enrollment; and 14. require first-time borrowers to endorse their loan checks at the institution and to pick up at the institution any loan proceeds remaining after deduction of institutional charges. ASSIGNMENT Procedures for submitting assignment of defaulted Perkins, NDSLs, or Defense Loans were discussed in Dear Colleague letter CB-95-13, dated June 1995 with a correction page provided in Dear Colleague letter CB-95-22, dated September 1995. [[Assignment conditions]] A school may assign a defaulted Perkins Loan or NDSL to the Department if - the school has not been able to collect despite having followed due diligence procedures, including at least a first level of collection and litigation, if required by the regulations in effect on the date the loan entered default; - the total amount of the borrower's account to be assigned, including outstanding principal, accrued interest, collection costs, and late charges, is $25 or more; and - the loan has been accelerated. A promissory note may be assigned only during the submission period established by the Department. [[Documents required for assignment]] A school must submit the following documents to the Department for any loan it proposes to assign: 1. an assignment formÑED Form 553, provided by the Department and completed by the school, which must include a certification by the school that it has complied with the due diligence procedures discussed in Sections 6 and 7 of this chapter, including at least a first level collection effort; 2. the original promissory note or a certified copy of the original note; 3. a copy of the repayment schedule; 4. a certified copy of any judgment order entered on the loan; 5. one photocopy of completed ED Form 553; 6. a complete statement of the repayment history; 7. copies of all approved requests for deferment and cancellation; 8. a copy of the notice to the borrower of the effective date of acceleration and the total amount due on the loan; 9. documentation that the school has withdrawn the loan from any firm that it employed for address search, billing, collection or litigation services and has notified that firm to cease collection activity on the loans; 10. copies of all pleadings filed or received by the institution on behalf of a borrower who has filed a petition in bankruptcy and whose loan obligation is determined to be nondischargeable; and 11. documentation that the institution has complied with all of the due diligence requirements if the school has a cohort default rate that is equal to or greater than 20% as of June 30 of the second year preceding the submission period. [[Limitations on assignment]] The Department will not accept assignment of a loan if - the school has not included the borrower's Social Security Number; - the borrower has received a discharge in bankruptcyÑunless the bankruptcy court has determined that the loan obligation is nondischargeable and has entered a judgment against the borrower or unless a court of competent jurisdiction has entered judgment against the borrower on the loan after the entry of the discharge order; - the school has sued the borrower unless the judgment has been entered and assigned to the United States; or - the loan has been canceled because the borrower has died or because the borrower has filed for, or been granted, cancellation due to permanent and total disability. Assignments should be mailed to: U.S. Department of Education Perkins Loan Assignment Processing Center P.O. Box 4136 Greenville, TX 75403-4136 If the Department accepts the assignment of a loan, it will give the school written notice to that effect. BY ACCEPTING THE ASSIGNMENT, THE DEPARTMENT ACQUIRES ALL RIGHTS, TITLE, AND INTEREST IN THE LOAN. After the Department has accepted the assignment of the loan, the school must endorse and forward to the Department any subsequent payment(s) the borrower may make. If the Department later determines an assigned loan to be unenforceable because of an act or omission on the part of the school or its agent, the school will have to compensate the Perkins Loan Fund in the amount of the unenforceable portion of the outstanding balance. Once the fund is reimbursed, the Department transfers all rights to the loan back to the school. A school must consider a borrower whose loan has been assigned to the United States for collection to be in default on the loan for the purpose of eligibility for assistance from SFA programs until the borrower provides the school with confirmation from the Department that he or she has made satisfactory arrangements to repay the loan. DEFAULT PREVENTION SOFTWARE [[IDPS Computer software]] The Department's computer software, called Institutional Default Prevention System (IDPS), is available free of charge to schools participating in our federal student aid programs. IDPS is a valuable tool for default prevention and reduction. To use IDPS, a school needs an IBM-compatible personal computer with at least 640K memory, MS-DOS (version 2.1 or newer), a hard disk (10 Megabytes or larger), and a printer. Dear Colleague letter 92-S-67, September 1992, included a description of the software and an order sheet. Questions about IDPS should be addressed to: Attn: IDPS Software Distribution U.S. Department of Education 7th and D Streets, S.W., ROB-3, Room 5012 Washington, D.C. 20202 Contact: Gail Gurley Telephone Number: 202/708-8834 DEFAULT AND STUDENT ELIGIBILITY Regulations specify that, to be eligible to receive assistance under the SFA programs, a student must not be in default and must CERTIFY that he or she is not in default on any SFA loan. This certification is found on the 1996-97 Free Application for Federal Student Aid (FAFSA). Prior to the 1996-97 award year, the certification was on the Student Aid Report (SAR). However, the regulations also provide an exception to the above rule. A student who is in default on a loan made under the Perkins Loan Program (a Perkins Loan, NDSL, or Defense loan) is eligible to receive assistance under an SFA program if the student is otherwise eligible and he or she: - repays the loan in full or - makes arrangements that are satisfactory to the holder of the loan to repay the loan balance and makes at least six consecutive monthly payments on time under these arrangements. The term "satisfactory arrangements to repay" is defined as the establishment of a new written repayment agreement and the making of one payment each month for six consecutive months. A student who is in default but has made satisfactory arrangements to repay the loan will receive a comment on his or her SAR that says "WARNING: Our records indicate that you are in DEFAULT on a federal student loan held by the U.S. Department of Education [or a state guaranty agency]. Since you have made satisfactory arrangements to repay this loan, you may be eligible to receive additional federal student aid at this time. However, if you fail to make scheduled payments, you will be denied future federal student aid." [[Willingness to repay]] When a school has filed suit to collect a defaulted Perkins Loan or NDSL and a judgment has been rendered on the loan, the borrower is obligated to repay only the amount of the judgment obtained on the loan. After a judgment is satisfied on the defaulted loan, the student is again eligible for future awards under these programs if all other eligibility criteria are met. However, if a judgment is satisfied INVOLUNTARILY (such as by garnishing the borrower's wages), a school should consider this as evidence of unwillingness to repay and should deny further loan assistance to the borrower. [[Bankruptcy]] Note that an SFA loan that is discharged in bankruptcy is not considered to be in default for the purpose of obtaining further grant or work assistance under the SFA programs. It is no longer a requirement that a borrower reaffirm a loan discharged in bankruptcy in order to be eligible to obtain additional student loans; this change is a result of the Bankruptcy Amendments Act of 1994, effective October 22, 1994. (Refer to Section 9 of this chapter.) [[Loan consolidation]] As stated earlier, the FFEL and Direct Loan Program regulations allow a borrower to receive a Consolidation Loan that could include a defaulted Perkins Loan. See Section 7 for more information. A defaulted loan that is being repaid under a COURT ORDER would remain in default status until paid and is not eligible for consolidation. *1* Once the loan is 240/270 days delinquent, bringing the defaulted loan to less than 240/270 days delinquent or even bringing it current will not eliminate the loan from the cohort default rate. |