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AwardYear: 1997-1998 EnterChapterNo: 11 EnterChapterTitle: William D. Ford Federal Direct Loan Program SectionNumber: 4 SectionTitle: Default PageNumbers: 53-66 The first part of this section discusses default's effect on borrowers and actions they can take to regain eligibility for SFA funds. The second part deals with default from the school's perspective and presents information on cohort default rates and the consequences for schools with rates above certain levels. DEFAULT'S EFFECT ON BORROWERS If borrowers fail to make any installment payment when due, the loan becomes delinquent. The Direct Loan Servicing Center makes repeated attempts to contact borrowers by telephone and letter, uses skip-tracing techniques and the assistance of other government agencies to locate borrowers if their whereabouts become unknown, and resolves repayment problems with delinquent borrowers to prevent defaults. Borrowers (or endorsers, if applicable) who become delinquent or default may be required to pay collection costs. [[Definition of default]] Borrowers are in default if they fail to make a payment for 180 days or if the Department concludes they do not intend to honor their obligation to repay. The Department will "accelerate" a defaulted loan, that is, declare the entire balance and accrued interest immediately due and payable. [[Department actions against borrowers who default]] The Department may take any action authorized by law to collect a defaulted Direct Loan, including - filing a lawsuit against the borrower, - reporting the default to national credit bureaus, - requesting the Internal Revenue Service to offset the borrower's federal income tax refund, and - garnishing the borrower's wages. Before reporting the default to a national credit bureau or assessing collection costs, the Department gives the borrower written notice of its proposed actions, an opportunity to enter into a repayment agreement, and an opportunity for a review of the loan's status. Once the Department notifies a credit bureau of a borrower's default, the credit bureau may provide credit inquirers with that information for up to seven years from the date the loan is first reported as a default or, for a borrower who reenters repayment and again allows the loan to default, up to seven years from the date of the second default. The Department may designate the Income Contingent Repayment Plan for a borrower who defaults on a Direct Subsidized or Unsubsidized Loan or a Direct Subsidized or Unsubsidized Consolidation Loan. (The Income Contingent Repayment Plan is not available for Direct PLUS Loans and Direct PLUS Consolidation Loans.) Further, a borrower in default may not receive deferments, although forbearance may be available (see "Deferment" in Section 2.) [[Reinstatement of borrower eligibility]] Borrowers in default are ineligible for SFA funds but can take certain actions to have eligibility reinstated. As mentioned in Section 1, a borrower may repay a defaulted loan in full or make satisfactory repayment arrangements, defined as six consecutive, voluntary, on time, full monthly payments that are reasonable and affordable given the borrower's financial situation. "On time" means a payment made within 15 days of the scheduled due date. "Voluntary" payments are those the borrower makes directly, whether or not a judgment exists. Voluntary payments do not include those obtained by income tax offset, garnishment, or income or asset execution. For purposes of regaining eligibility, a student may make satisfactory repayment arrangements on a defaulted Direct Loan only once. For purposes of consolidating a defaulted loan, three payments are required instead of six; generally, a borrower may instead agree to repay the consolidation loan under the Income Contingent Repayment Plan. For more information on consolidating defaulted loans, see Section 3. If a borrower regains eligibility during an enrollment period (for example, if the sixth payment under a satisfactory repayment arrangement is made after the start of an enrollment period), the borrower regains eligibility for the entire loan period. [[Requesting forbearance while in school]] A borrower who makes satisfactory repayment arrangements and regains SFA eligibility must continue to make payments on the defaulted loan. (A borrower who is unable to do so while attending school should request forbearance on the loan--as mentioned above, deferment is not an option for borrowers in default. See Section 2 for a discussion of forbearance.) [[Rehabilitation]] If a borrower whose loan is in default makes 12 consecutive, on time, reasonable, and affordable monthly payments under a satisfactory repayment agreement (which may include the six consecutive monthly payments necessary to regain SFA eligibility), the loan is "rehabilitated." In such a case, the Department instructs any credit bureau to which the default was reported to remove the default from the borrower's credit history. [[Reaffirmation]] A loan on which collection activities have ceased because the Department has not been able to collect is still considered a defaulted loan for purposes of borrower eligibility. A borrower who wishes to borrow again under the Direct Loan Program must "reaffirm" the loan amount and make satisfactory repayment arrangements, as previously described. Because reaffirmation means legal acknowledgment of the loan, the borrower may have to sign a new promissory note or repayment schedule. Reaffirmed loans count toward a borrower's aggregate loan limits (see Section 2 for a discussion of loan limits). A borrower whose loan obligation is discharged in bankruptcy after the borrower has defaulted is again eligible for SFA Program funds (see Section 1). [[Sources of information about a borrower's default]] The Institutional Student Information Record (ISIR), Student Aid Report (SAR), or SAR Information Acknowledgement alerts schools that a borrower is in default on a federal education loan and is not eligible for federal financial aid. If the borrower has made satisfactory repayment arrangements, these documents will indicate the borrower is eligible for a loan but will include a warning that if scheduled payments are not made on the previous loan, future federal student aid will be denied. This information should be reconciled with documentation from the Direct Loan Servicing Center stating that repayment requirements continue to be satisfied. Schools must keep this documentation in the student's file. Once the information is reconciled, the student's eligibility for federal student aid funds can be evaluated. A borrower's financial history, which includes information about default, results from a data match between the Central Processing System (CPS), which processes data from the Free Application for Federal Student Aid (FAFSA), and the National Student Loan Data System (NSLDS). For more information on the NSLDS, see Chapter 3. DEFAULT'S EFFECT ON SCHOOLS Because FFEL Program cohort default rates have been a useful measure of institutional performance and an effective means of reducing defaults by removing high default institutions from the FFEL Program, the Department has established a similar cohort default rate measurement for the Direct Loan Program. Definitions of "cohort default rate" and "institutional eligibility requirements" for the Direct Loan Program are based on the percentage of a school's former students who default on Direct Loans. [[Cohort default rates]] Each year, the Department gives schools draft cohort rates along with the Department's Draft Cohort Default Rate Review Guide. After schools have reviewed their rates and had a chance to resolve any errors with the Department, the Department publishes the official cohort rates and notifies schools of their rates. Official cohort rates are based on the number of a school's former students who enter repayment in one fiscal year and default before the end of the next fiscal year. For purposes of a school's Direct Loan cohort rate, a Direct Loan is considered in default when the borrower's (or endorser's) failure to make an installment payment when due persists for 270 days. For non-degree-granting proprietary institutions, a loan is also considered in default if the student has been in repayment under the Income Contingent Repayment Plan for at least 270 days, and the borrower's scheduled payments are less than $15 and less than the monthly interest accruing on the loan. A student who receives a Direct Loan from one school, later transfers, and subsequently defaults will count in EACH school's default rate. Public, Private Nonprofit, or Proprietary Degree-Granting Schools For any fiscal year during which 30 OR MORE current and former students at a school enter repayment on Direct Loans used for attendance at the school (or enter repayment on the portion of a Direct Consolidation Loan used to repay those loans), the Direct Loan Program cohort default rate is the percentage of students who enter repayment in that fiscal year ON BOTH FFELS AND DIRECT LOANS whose loans are in default before the end of the following fiscal year. The following is an example of how the cohort default rate is calculated for a school with 30 OR MORE borrowers in repayment. In FY 1995, 80 current and former Direct Loan borrowers at Van Dam Conservatory entered repayment on their loans. By the end of FY 1996, 20 of those students, or one-fourth, had defaulted. Van Dam Conservatory's FY 1995 cohort default rate is 25 percent. The formula for calculating a cohort default rate for schools with 30 or more borrowers entering repayment is Number of students who entered repayment in FY A who default by the end of FY B (the following FY) ------------------------------------- X 100 percent Number of students who entered repayment in FY A Van Dam's default rate is 25% (20/80 X 100 percent = 25%.) For any fiscal year in which FEWER THAN 30 of the school's current or former students enter repayment as described above, the Direct Loan Program cohort default rate is the percentage of those students who - entered repayment in any of the three most recent fiscal years, and - whose loans are in default before the end of the fiscal year immediately following the fiscal year in which they entered repayment. The example below shows how the cohort default rate is calculated for a school with FEWER THAN 30 borrowers in repayment. Because a cohort default rate calculation was not done for Direct Loans until FY '95, the years in this example will be projected; the principle is the same, however. Illyria Institute had 15 borrowers who entered repayment in FY 1995; 10 of those defaulted by the end of FY 1996. Illyria had 25 borrowers entering repayment in FY 1996; 5 of those defaulted by the end of FY 1997. Illyria had 20 borrowers entering repayment in FY 1997; 5 of those defaulted by the end of FY 1998. Illyria's FY 1997 cohort default rate would be calculated as follows: [[The calculation on page 11-57 is currently unavailable for viewing. Please reference your paper document for additional information.]] Illyria's default rate is 33.3% (20/60 X 100 percent = 33.3%.) A cohort default rate is like a snapshot of the time period affected. Changes that occur after the data for a particular cohort default rate are collected will not affect that default rate calculation. To illustrate, let's take Van Dam Conservatory's FY 1995 cohort default rate. Those students who enter repayment in FY 1995 (10/1/94--9/30/95) and default before the end of FY 1996 (10/1/95--9/30/96) are counted in Van Dam's FY 1995 cohort default rate. Here are examples of three students who attended Van Dam and who subsequently defaulted: - Andrew entered repayment in October 1994 and subsequently defaulted in May 1996. He won $10,000 in a lottery in November 1996 and promptly repaid his loan in full. Nevertheless, Andrew will continue to be counted as being in default in Van Dam's FY 1995 cohort default rate calculation. - Olivia defaulted in July 1996 but made satisfactory arrangements to repay her loan in December 1996. For purposes of calculating Van Dam's FY 1995 cohort default rate, Olivia continues to be counted as in default. - Jesse made payments on a loan that entered repayment in FY 1995. In spring 1996, Jesse lost his job; unable to find another, he defaulted on his loan in November 1996. Because Jesse's default occurred after the FY 1995 cohort default rate calculation period ended (after September 30, 1996), his loan was reported only as being in repayment. Jesse's loan is not counted as a default in ANY fiscal year's cohort default rate calculation. Proprietary Non-Degree-Granting Schools For any fiscal year during which 30 OR MORE current and former students at the school enter repayment as described on page 11-56, the Direct Loan Program cohort default rate is the percentage of those students - who enter repayment in that fiscal year whose loans are in default before the end of the following fiscal year, or - who, before the end of that following fiscal year, have for 270 days been in repayment under the Income Contingent Repayment Plan, with scheduled payments that are less than $15 a month and less than the interest accruing on the loan. See the first example on page 11-57. For any fiscal year in which FEWER THAN 30 of the school's current or former students enter repayment as described previously, the Direct Loan Program cohort default rate is the percentage of those students - who entered repayment in the three most recent fiscal years whose loans are in default before the end of the fiscal year immediately following the year in which they entered repayment, or - who, before the end of that following fiscal year, have for 270 days been in repayment under the Income Contingent Repayment Plan, with scheduled payments that are less than $15 a month and less than the interest accruing on the loan. See the second example on page 11-57. Weighted Average Cohort Rate (Dual-Program Cohort Rate) If there are both FFELs and Direct Loans entering repayment in the school's cohort, the Department calculates a WEIGHTED AVERAGE COHORT RATE, also known as a DUAL-PROGRAM COHORT RATE. The Department bases this rate on the number of borrowers, not the number of loans. For example, if a borrower enters repayment on both FFELs and Direct Loans in the same cohort, the student will be counted only once in the calculation used to determine the cohort default rate. A summary of borrowers included in the types of cohort default rates is presented below. [[The "summary of borrowers included in the types of cohort default rates" on page 11-59 is currently unavailable for viewing. Please reference your paper document for additional information.]] Cohort Default Rates for Schools that Change Status Default rates apply to ALL divisions and locations of a school as it exists on the first day of the fiscal year for which the rate is calculated. The rates continue to apply to all divisions and locations from the date the school is notified of its rate until the Department notifies the school that the rate no longer applies. When a school changes its status--by branching, consolidating, or changing ownership, for example--the school's cohort default rate is reviewed based on its new status. These changes affect both the draft and the official cohort default rate calculations for each school. [[From a location (branch) to a freestanding school]] A school that was formerly a branch of another proprietary, postsecondary vocational, or vocational school and that seeks institutional eligibility in its own right must operate independently from its former "parent" school for at least two years before being eligible to apply for Direct Loan participation. If the school is eligible to participate, the Department will calculate the Direct Loan Program cohort default rate or weighted average default rate based on the school's status as of October 1 of the fiscal year for which the rate is being calculated. [[From a freestanding school to a separate location (branch) of another school]] To calculate an official cohort default rate for a school that has acquired a freestanding school as a branch, the Department will combine the number of students who enter repayment during the applicable fiscal year and the number of students who default during that year for BOTH the former freestanding school and the other school. The new cohort default rate is the newly consolidated school's official cohort default rate and will apply to ALL ITS BRANCHES. Here is an example of how an official default rate is calculated when a freestanding school becomes a separate location of another school. [[The example calculation on page 11-60 is currently unavailable for viewing. Please reference your paper document for additional information.]] [[From a location (branch) of one school to a location of another school]] For a school that changes from being a branch of one school to being the branch of another, the Department will combine borrower repayment and default data as just described for the change from a freestanding school to a branch campus. The Department will combine the school's former "parent" repayment and default data and its new "parent" repayment and default data and use it to calculate a revised official default rate for the new "parent" school AND FOR ALL ITS BRANCHES. [[Two or more freestanding schools merge]] If two or more freestanding schools merge, the Department calculates the cohort default rate by combining the number of students who enter repayment and the number of students who default, then calculating an official cohort default rate for each school. [[School changes ownership]] A new owner applying to participate in SFA Programs as a continuation of the old school is responsible for the school's cohort default rates and for implementing any requirements associated with those rates. New owners should be aware that cohort default rates calculated for fiscal years before the ownership change may affect the school's ability to participate in SFA Programs. A school changing ownership may be refused certification to participate in any SFA Program, or may be granted provisional certification, based on high cohort default rates calculated before the ownership change. Consequences Associated with Official Cohort Default Rates Above Certain Thresholds When the Department sends schools their official cohort default rates, it will include a warning for schools with rates above 20 percent that they are in danger of facing sanctions. [[Cohort default rates of 25 percent or greater for three consecutive years]] If a school has a combination of a FFEL Program cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate of 25 percent or greater for the three consecutive fiscal years for which data are available, the school loses its eligibility to participate in the Direct Loan Program and is subject to Limitation, Suspension, and Termination (LS&T) action against participating in the FFEL Program. A school also can lose its eligibility for the Direct Loan Program on the basis of a high FFEL Program cohort default rate. A school ceases to be eligible to participate in Direct Loans beginning 30 days from the date it receives notice of its loss of eligibility, unless it can demonstrate to the Department's satisfaction that exceptional mitigating circumstances make the eligibility loss inequitable. The Department places an ineligible school on the reimbursement system of payment until the 30th day following the date the school receives notification of its eligibility loss or, if the school appeals, until the appeal is decided. The Department removes a school from reimbursement if the school's appeal is successful. If the appeal is denied, the school is not eligible to participate in the Direct Loan Program for the remainder of the current fiscal year plus the following two fiscal years. A school that loses eligibility must immediately inform all current and potential students and must make clear that they cannot receive Direct Loans or FFELs for attendance at the school. However, students who receive a first disbursement on a Direct Loan or FFEL before the school loses eligibility may receive subsequent disbursements on those loans. Students attending the school remain eligible for in-school deferments. [[Schools not subject to loss of eligibility]] Historically black colleges and universities (HBCUs), community colleges that Native American nations control ("tribally controlled"), and Navajo community colleges will not lose Direct Loan Program eligibility because of default rates greater than 25 percent for the three most recent fiscal years for which data are available. This exemption for these schools extends to July 1, 1998. Schools in these categories may appeal their cohort rates on the basis of the appeals described beginning on the next page (erroneous data or exceptional mitigating circumstances). To remain eligible to participate in the Direct Loan Program, strict standards must be met for appeals, as explained below. More comprehensive information is provided in the Department's official cohort default rate notification letter and the FY 1995 Official Cohort Default Rate Guide. Schools must keep the official default-rate notification letter for program review and audit purposes. [[Cohort default rates that exceed 40 percent]] The Department may take LS&T action against a school's participation in ALL SFA Programs if the school has a Direct Loan Program cohort rate--or, if applicable, a weighted average cohort rate--greater than 40 percent for a fiscal year. A school's only acceptable defense against such an LS&T action is that the rate is not final. If a hearing officer determines that the cohort default rate on which the proposed LS&T action is based is not the final rate as determined by the Department and that the correct rate would be less than 40 percent, the LS&T sanction will not be imposed. Appeal Procedures for Schools with High Official Cohort Default Rates The type of default rate appeal a school may submit varies depending on the school's default rate category. Schools must follow the appeal timeframes and standards set forth in the FY 1995 Official Cohort Default Rate Guide, or they will be prohibited from challenging their default rates. Schools subject to loss of Direct Loan eligibility (those schools with cohort default rates of 25 percent or greater for the three most recent fiscal years) may appeal on the basis of erroneous data or exceptional mitigating circumstances. Schools subject to loss of all SFA eligibility (those schools with default rates above 40 percent) may appeal only on the basis that the default rate is not the final rate determined by the Department and that the correct rate would be less than 40 percent. Erroneous Data A school may appeal on the grounds that the calculated default rate is not accurate for any of the three fiscal years used to determine the end of the school's participation in Direct Loans, and that if the Department recalculated using corrected data, the rate would be less than 25 percent for any of the three relevant fiscal years. A school must submit an appeal, in writing, to the Department no later than the 30th calendar day following the date the school receives notification of the end of its Direct Loan participation. Exceptional Mitigating Circumstances A school may appeal under one (or both) of the exceptional mitigating circumstances that the Department recognizes would make the school's loss of eligibility inequitable (see below). An appeal submitted based on these circumstances must contain an attestation from an independent auditor that the statements the school's management makes in the appeal are complete, accurate, and determined in accordance with applicable regulations. The appeal also must contain a certification, under penalty of perjury, by the school's chief executive officer that all the information the school provides to support its appeal is correct. [[Participation rate index equal to or less than 0.0375]] The participation rate index criterion is based on a school's FFEL Program cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate and the percent of the school's regular students enrolled on at least a half-time basis who borrow under the Direct Loan Program. The rate is calculated by multiplying the school's FFEL Program cohort default rate, Direct Loan Program cohort rate, or weighted average cohort rate by the percent of the school's regular students enrolled at least half time who borrowed under the Direct Loan Program during a 12-month period that ended during the six months immediately preceding the fiscal year used to determine the cohort of borrowers for the school's rate. If this product is less than or equal to 0.0375, the school would meet the exceptional mitigating circumstance criterion. A school may use the participation rate index criterion only if it has a FFEL Program cohort rate, a Direct Loan Program cohort rate or, if applicable, a weighted average cohort rate of less than 40 percent for the most recent fiscal year. [[Economically disadvantaged background rate]] To be eligible under the economically disadvantaged background rate, a school must demonstrate that it SUCCESSFULLY serves students from economically disadvantaged backgrounds. A school qualifies by providing documentation that during a 12- month period that ended during the six months immediately preceding the fiscal year used to determine the cohort of borrowers for the school's rate, 70 percent of its regular students came from a disadvantaged background. A degree-granting school demonstrates that it successfully serves students from economically disadvantaged backgrounds by documenting that 70 percent of its regular students who were initially enrolled on a full-time basis--and were scheduled to complete their educational programs during the same 12-month period the school chose to determine the percentage of students that come from economically disadvantaged backgrounds--have completed their educational programs (COMPLETION RATE). A non-degree-granting school demonstrates that it successfully serves students from economically disadvantaged backgrounds by documenting that 50 percent or more of its former regular students who remained in the program beyond the point they would have received a 100 percent tuition refund from the school are employed in an occupation for which the school provided training. This PLACEMENT RATE is based on those regular students initially enrolled on at least a half-time basis and originally scheduled to complete their educational programs during the same 12-month period the school chose to determine the percentage of students that come from economically disadvantaged backgrounds. The rate does not include students still enrolled and making satisfactory academic progress. Students may be counted as employed only if, on the date following 12 months after the date of their last day of attendance, they are employed, or have been employed, for 13 weeks in an occupation for which the school provided training. The Secretary issues a decision on a school's appeal within 45 calendar days after the school submits the complete appeal. Schools should direct questions about cohort rates, the draft review process, or the appeals process to the Department's Default Management Division: U.S. Department of Education Default Management Division Portals Building, Suite 6211 600 Independence Avenue, SW Washington, DC 20202-5353 202-708-9396 General Requirements to Reduce Defaults [[Consumer disclosure requirements]] A school that makes marketing claims about its graduates' job placement must provide completion and job placement rates to prospective students. In addition, if the state in which a school operates has licensing requirements for any career field for which the school provides training, the school must notify prospective students of those requirements. All schools must give current and prospective students information on costs of attendance, programs offered, and the school's refund policy. A school that makes marketing claims about job placement in order to recruit students must provide the most recent available data on employment statistics, graduation statistics, and other information necessary to substantiate the truthfulness of its claims. A school with programs that include some correspondence courses must give current and prospective students coursework and due dates for lessons, the date by which resident training must begin, the location of residential training, and the timeframe for completing the training. Schools must give current and prospective students the completion and graduation rates of its full-time undergraduate students enrolled in certificate or degree programs. The student is counted as having completed or graduated if, within 150 percent of the time normally required for the program's completion, he or she has completed the program, graduated, or enrolled in a program for which the current program provided substantial preparation. Schools may exclude from their calculations the completion or graduation rate of students who leave school to serve in the armed forces, to serve on official church missions, or to enter a recognized foreign aid service of the federal government. Chapter 3 provides more information on these requirements. [[Default reduction initiatives]] The following requirements apply to all schools and are intended to help reduce the number of borrowers who default. A school that admits students with no high school diploma or its equivalent must make available to those students a General Education Development (GED) program. The school does not have to develop its own GED program or pay students' tuition for such a program, but the school must be sure a GED program is nearby and must inform students of the program's availability. This requirement applies to all SFA Programs except SSIG and Byrd Scholarship programs. See Chapter 3 for more details on GED requirements. As mentioned previously in this chapter, Direct Loan borrowers who are entering the first year of an undergraduate programÐand who have not previously received a Direct Loan or FFELÐmay not receive the first installment of loan proceeds until 30 days after the first day of the program of study. All schools participating in SFA Programs are required to have a fair and equitable refund policy. Unless the school's policy is more stringent, schools must at least provide students with pro rata refunds if the students are attending the school for the first time and do not complete 60 percent of the enrollment period for which they have been charged. Chapter 3 explains pro rata refund calculations. |