CDR Manipulation: Who is REALLY Responsible?

Mary Lyn Hammer

CDR Manipulation:  Who is REALLY Responsible?

By Mary Lyn Hammer, President and CEO

Champion College Services, Inc.

 

Information and data readily available on the U.S. Department of Education’s websites shows a different picture of what is going on with cohort default rates.  Many would like the public to believe that for-profit institutions and their third party servicers are manipulating their default rates to maintain eligibility in the Title IV Federal Student Loan and Grant Programs.  Since the school’s eligibility is based upon their official cohort default rates, the schools definitely have a vested interest in the outcome.  Most of these institutions, however, are appropriately doing a very good job of educating their borrowers consistent with the mandates for them to do so.

Incentives for federal student loan servicing contractors who service millions of student loans are also based, in part, upon default rate results.  The dollar numbers for these contracts outweigh any individual for-profit education institution.

The U.S. Department of Education and Congress may also have significant incentives to make their “Direct Loan Program” successful in the public eye.  The Health Care and Education Reconciliation Act of 2010 (http://www.gpo.gov/fdsys/pkg/PLAW-111publ152/pdf/PLAW-111publ152.pdf) eliminated the Federal Family Education Loan Program (FFELP) program and no subsequent loans were permitted to be made under the program after June 30, 2010.  This eliminated all private federal student loans and many jobs in the United States.  It also eliminated a competitive environment for quality and the student’s choice between private and direct Federal Stafford Loans for their education.

The FY 2009 3-year Cohort Default Rate

The FY 2009 3-year Cohort Default Rate was the first official 3-year cohort default rate as defined in the Higher Education Opportunity Act of 2008 (http://www2.ed.gov/policy/highered/leg/hea08/index.html) where Section 436(e) expanded the definition from a 2-year rate to a 3-year rate.  This includes student borrowers who entered repayment from October 1, 2008, through September 30, 2009.

FY 2009 OFFICIAL NATIONAL 3-YEAR COHORT DEFAULT RATES	Number of Schools	Borrower Default Rate (%)	Number of Borrowers Defaulted	Number of Borrowers Entered repayment
PUBLIC	1,628	11.0%	196,032	1,778,645
Less than 2 years	141	16.2%	1,202	7,401
2-3 years	851	18.3%	94,945	518,299
4 years (+)	636	7.9%	99,885	1,252,945
PRIVATE	1,710	7.5%	63,047	835,492
Less than 2 years	42	23.1%	950	4,106
2-3 years	174	14.5%	2,357	16,244
4 years (+)	1,494	7.3%	59,740	815,142
PROPRIETARY	2,142	22.7%	229,315	1,006,190
Less than 2 years	1,100	21.5%	27,788	129,235
2-3 years	731	22.9%	64,146	279,713
4 years (+)	311	23.0%	137,381	597,242
FOREIGN	427	7.3%	646	8,777
UNCLASSIFIED	1	0.0%	0	5
TOTAL	5,908	13.4%	489,040	3,629,109

Details are available at http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdrschooltype3yr.pdf.

 

The FY 2009 3-year Cohort Default Rate for FFELP Loans

 

The cohort default rates by loan program are also published by the U.S. Department of Education.  The FFELP represent those federal Stafford student loans made by private lenders or secondary markets that are “guaranteed” by federal loan guarantee agencies.  If the student defaults, the lenders are “reimbursed” a percent of the student loan and the debt is, then, managed by the U.S. Department of Education.

 

Details are available at http://www2.ed.gov/offices/OSFAP/defaultmanagement/3yrffelrates.pdf.

 

The FY 2009 3-year Cohort Default Rate for Federal Direct Student Loans

 

The Federal Direct Student Loans (FDSL or Direct Loans) are made by the government directly to the students and cut out the “middle men” or the lenders and guarantee agencies.  The government contracts with servicers to collect upon these loans.  Ironically, the companies chosen for servicing the direct loans are the same companies eliminated in the FFELP programs.

 

The public institutions represented the majority of schools participating in the FDSL programs prior to the elimination of the FFELP program. 

 

Details are available at http://www2.ed.gov/offices/OSFAP/defaultmanagement/3yrdlrates.pdf.

 

Top 100 Loan Holders for the FY 2009 3-year Cohort Default Rate

The FY 2009 3-year Cohort Default Rates (CDR) published by the U.S. Department of Education (ED) for the “Top 100 Loan Holders” shows that ED holds 3 positions in the top 100 loan holders.  These numbers are not consistent with the published FY 2009 3-year cohort default rates for Direct Loans seen above.

 All of ED’s FY 2009 3-year Cohort Default Rates in the “Top 100 Loan Holders” report are well above the national cohort default rate of 13.4%.

ED’s 3-year CDR information is as follows:

Details are available at http://www2.ed.gov/offices/OSFAP/defaultmanagement/2009holders3yr.pdf .

Federal Student Loan Servicer Allocations Are Based in Part upon Default Rates

Customer Service Performance Measure Metrics for the Department of Education’s (the Department’s) federal loan servicers is measured on a quarterly basis. 

The explanation of allocation metrics are as follows:

Allocation Methodology

 

The Department has provided its federal loan servicers broad latitude to determine how best to service their assigned loans in order to yield high performing portfolios and high levels of customer satisfaction. We use metrics to measure the performance of each federal loan servicer.

There are two sets of performance metrics that we use to allocate new loan volume. One set of performance metrics applies to FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae. The other set of metrics applies to the NFP Members of the federal loan servicer team.

 

FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae

 

The five performance metrics the Department uses to allocate new loan volume among FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae are as follows:

 

·       Three metrics measure the satisfaction among separate customer groups, including borrowers, financial aid personnel at postsecondary schools participating in the federal student loan programs, and Federal Student Aid and other federal agency personnel who work with the servicers.

·       Two metrics measure the success of default prevention efforts as reflected by the percentage of borrowers and percentage of dollars in each servicer’s portfolio that go into default.

 

The Department compiles quarterly customer satisfaction survey scores and default prevention statistics for FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie Mae into annual measures to determine each servicer’s allocation of loan volume. Annual allocations are determined as described in each servicer’s contract under Attachment A-4, Ongoing Allocation Methodology.

 

·       The Department factors the servicers’ scores on all five of the performance measures into the allocation formula in the same way. The servicer with the best score (highest ACSI score or lowest default statistic) is awarded four points on that dimension. The servicer with the next best score is given three points. Third and fourth place are allocated two points and one point, respectively. Thus, ten points (4 + 3 + 2 + 1 = 10) are allocated among the servicers for each of the five performance measures.

·       To determine an individual servicer’s allocation of new loans, the Department first sums the points that servicer earns across the five performance measures. The Department then divides this total by 50. The result of this division is the servicer’s proportion of new work. The Department divides the servicer’s total by 50 because that is the total number of points allocated to all servicers across the five performance measures (10 total points per measure x 5 performance measures = 50).

 

NFP Members of the Federal Loan Servicer Team

 

The five performance metrics the Department uses for the NFP members of the federal loan servicer team are as follows:

 

·       Two metrics measure the satisfaction among separate customer groups, including borrowers and Federal Student Aid and other federal agency personnel who work with the servicers.

·       Three metrics measure the success of default prevention efforts as reflected by the percentage of borrowers that are 30 or fewer days delinquent, percentage of borrowers that are more than 90 days delinquent, and percentage of borrowers for whom a delinquency of more than 180 days was resolved.

 

The Department does not guarantee that an NFP member of the federal loan servicing team will receive more than its initial allocation of borrower accounts. The first allocation of additional volume for NFP members of the federal loan servicer team will not occur before August 2013.

 

Performance Measure Methodology

 

Customer Satisfaction

 

As applicable, the Department has segmented performance scores to ensure comparability across the federal loan servicers regardless of differences in the types of borrowers or schools serviced. We calculate separate borrower customer satisfaction scores for each loan status (borrowers in repayment, in grace, and/or in school). We calculate school customer satisfaction scores and default prevention statistics by type of school (private, proprietary, and public). We use the average of the segment scores in our allocation methodology.

 

The analytical methodology used by our independent vendor, CFI Group, to evaluate customer satisfaction is consistent with that used in the American Customer Satisfaction Index (ACSI). The ACSI, established in 1994, is a uniform, cross-industry measure of satisfaction with goods and services available to U.S. consumers, including both the private and public sectors. The ACSI summarizes the responses to three uniform survey items that measure customer satisfaction with a score that has a minimum score of zero and a maximum score of 100. CFI encourages companies that measure customer satisfaction using the ACSI to strive to achieve and maintain overall customer satisfaction scores in the low 80s. The highest ACSI score ever recorded is a 91, and the national average across all economic sectors is 76.

 

CFI Group specializes in the application of the ACSI methodology to individual organizations. As our independent vendor, CFI Group develops the surveys and conducts the analysis.

 

Default Prevention

 

The Department generates default prevention measures with simple arithmetic and rounds all results to the hundredths place.

 

FedLoan Servicing (PHEAA), Great Lakes Educational Loan Services, Inc., Nelnet, and Sallie

Mae

 

The Department divides the number of borrowers in repayment that go into default during the quarter by the number of unique borrowers in the repayment portfolio at the end of each quarter to generate each servicer’s defaulted borrower “count” statistic.

The Department divides the dollar value of the loans that go into default during the quarter by the total value of the repayment portfolio at the end of the quarter to generate each servicer’s defaulted borrower “amount” statistic.

 

NFP Members of the Federal Loan Servicer Team

 

The Department divides the number of borrowers in current repayment status who are less than or equal to 30 days delinquent at the end of the quarter by the number of all borrowers in both current and delinquent repayment status at end of each quarter to generate the percent of “borrowers in current repayment status” statistic.

 

The Department divides the number of borrowers who are greater than 90 days delinquent during the quarter by the number of borrowers in both current and delinquent repayment status at the end of each quarter to generate the percent of “borrowers greater than 90 days delinquent” statistic.

The Department divides the number of borrowers who are less than or equal to 30 days delinquent at the end of quarter and who had a delinquency of 180 days or greater at the end of the prior quarter by the number of borrowers who are 180 days or more delinquent at the end of the quarter to generate the “delinquency resolution of borrowers greater than 180 days delinquent” statistic.

 

The quarterly rankings for defaulted borrower counts change regularly as follows:

 

Note:  The June 30, 2011, Quarterly Allocation Report was not available on the IFAP website.

 

The final calculation for servicing allocation changed annually as follows:

 

Information for these charts was found at http://ifap.ed.gov.

 

As demonstrated in the annual allocation calculations, federal loan servicers have the most to gain and lose based upon their loan portfolios.

 

The federal servicers are solely responsible for determining eligibility and collecting proper documentation for deferments  and forbearances that greatly affect their loan portfolios and directly contribute the measures and metrics upon which ED relies to determine the percent of the federal student loan portfolio that each of the servicers is awarded each year. 

 

Schools Are Mandated to Perform Borrower Counseling for Student Loans

 

The institutions are mandated to perform borrower education (counseling) to students and are somehow seen as manipulative when their students understand and exercise the very rights and responsibilities that the schools are tasked with teaching them.

 

Borrower Education Requirements

 

PART 685 – WILLIAM D. FORD FEDERAL DIRECT LOAN (Direct loan) PROGRAM

34 CFR § 685.304  Counseling borrowers.  Institutions of higher education are mandated to provide relevant information to direct loan borrowers during entrance and exit counseling.  This includes information in the Master Promissory Note (MPN) and on federal websites designed to assist and education student loan borrowers.

The MPN and the federal websites include detailed information about deferment and forbearance eligibility and instructions for applying for and getting approved for these options when the students cannot make regular monthly payments.  Information includes and is not limited to the following:

 

1.     Master Promissory Note for Direct Student Loans

 

21. Deferment and forbearance (postponing payments). If you meet certain requirements, you may receive a deferment that allows you to temporarily stop making payments on your loan. If you cannot make your scheduled loan payments, but do not qualify for a deferment, we may give you a forbearance. A forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments, or extend the time for making payments.

 

Deferment

 

You may receive a deferment:

·       While you are enrolled at least half-time at an eligible school;

·       While you are in a full-time course of study in a graduate fellowship program;

·       While you are in an approved full-time rehabilitation program for individuals with disabilities;

·       While you are unemployed (for a maximum of three years; you must be diligently seeking, but unable to find, full-time employment);

·       While you are experiencing an economic hardship (including Peace Corps service), as determined under the Act (for a maximum of three years);

·       While you are serving on active duty during a war or other military operation or national emergency or performing qualifying National Guard duty during a war or other military operation or national emergency and, if you were serving on or after October 1, 2007, for an additional 180-day period following the demobilization date for your qualifying service; or

·       If you are a member of the National Guard or other reserve component of the U.S. Armed Forces (current or retired) and you are called or ordered to active duty while you are enrolled at least half-time at an eligible school or within 6 months of having been enrolled at least half-time, during the 13 at an eligible school or within 6 months of months following the conclusion of your active duty service, or until you return to enrolled student status on at least a half-time basis, whichever is earlier.

 

You may be eligible to receive additional deferments if, at the time you received your first Direct Loan, you had an outstanding balance on a loan made under the Federal Family Education Loan (FFEL) Program before July 1, 1993. If you meet this requirement, contact your servicer for information about additional deferments that may be available.

You may receive a deferment based on your enrollment in school on at least a half-time basis if: (1) you submit a deferment request to your servicer along with documentation of your eligibility for the deferment, or (2) your servicer receives information from the school you are attending that indicates you are enrolled at least half-time. If your servicer processes a deferment based on information received from your school, you will be notified of the deferment and will have the option of canceling the deferment and continuing to make payments on your loan.

For all other deferments, you (or, for a deferment based on active duty military service or qualifying National Guard duty during a war or other military operation or national emergency, a representative acting on your behalf) must submit a deferment request to your servicer, along with documentation of your eligibility for the deferment. In certain circumstances, you may not be required to provide documentation of your eligibility if your servicer confirms that you have been granted the same deferment for the same period of time on a FFEL Program loan. Your servicer can provide you with a deferment request form that explains the eligibility and documentation requirements for the type of deferment you are requesting. You may also obtain deferment request forms and information on deferment eligibility requirements from your servicer’s web site.

 

If you are in default on your loan, you are not eligible for a deferment.

 

You are not responsible for paying the interest on a Direct Subsidized Loan during a period of deferment. However, you are responsible for paying the interest on a Direct Unsubsidized Loan during a period of deferment.

 

Forbearance

 

We may give you a forbearance if you are temporarily unable to make your scheduled loan payments for reasons including, but not limited to, financial hardship and illness.

 

We will give you forbearance if:

·       You are serving in a medical or dental internship or residency program, and you meet specific requirements;

·       The total amount you owe each month for all of the student loans you received under Title IV of the Act is 20% or more of your total monthly gross income (for a maximum of three years);

·       You are serving in a national service position for which you receive a national service award under the National and Community Service Trust Act of 1993. In some cases, the interest that accrues on a qualified loan during the service period will be paid by the Corporation for National and Community Service;

·       You are performing service that would qualify you for loan forgiveness under the teacher loan forgiveness program that is available to certain Direct Loan and FFEL program borrowers;

·       You qualify for partial repayment of your loans under the Student Loan Repayment Program, as administered by the Department of Defense; or

·       You are called to active duty in the U.S. Armed Forces.

 

To request a forbearance, contact your servicer. Your servicer can provide you with a forbearance request form that explains the eligibility and documentation requirements for the type of forbearance you are requesting. You may also obtain forbearance request forms and information on forbearance eligibility requirements from your servicer’s web site.

 

Under certain circumstances, we may also give you forbearance without requiring you to submit a request or documentation. These circumstances include, but are not limited to, the following:

·       Periods necessary for us to determine your eligibility for a loan discharge;

·       A period of up to 60 days in order for us to collect and process documentation related to your request for a deferment, forbearance, change in repayment plan, or consolidation loan (we do not capitalize the interest that is charged during this period); or

·       Periods when you are involved in a military mobilization, or a local or national emergency.

 

You are responsible for paying the interest on both Direct Subsidized Loans and Direct Unsubsidized Loans during a period of forbearance.

 

2.      Information provided on http://studentaid.ed.gov/repay-loans/deferment-forbearance for students describes deferment and forbearance eligibility as follows:

 

a.      Am I eligible for a loan deferment?  The following table provides situations that may make you eligible for a deferment of your federal student loan. 

 

Situations When You May Apply for Deferment	Deferment Available? (and for how long, if applicable)
	Direct Loans	FFEL loans	Perkins Loans
During a period of at least half-time enrollment in college or career school	Yes	Yes	Yes
During a period of study in an approved graduate fellowship program or in an approved rehabilitation training program for the disabled	Yes	Yes	Yes
During a period of unemployment or inability to find full-time employment	Yes (for up to 3 years)	Yes (for up to 3 years)	Yes (for up to 3 years)
During a period of economic hardship (includes Peace Corps service)	Yes (for up to 3 years)	Yes (for up to 3 years)	Yes (for up to 3 years)
During a period of service qualifying for Perkins Loan discharge/cancellation	No	No	Yes
During a period of active duty military service during a war, military operation, or national emergency	Yes	Yes	Yes
During the 13 months following the conclusion of qualifying active duty military service, or until you return to enrollment on at least a half-time basis, whichever is earlier, if ·       you are a member of the National Guard or other reserve component of the U.S. armed forces and ·       you were called or ordered to active duty while enrolled at least half-time at an eligible school or within six months of having been enrolled at least half-time	Yes	Yes	Yes

If you are a Direct Loan or FFEL Program borrower who has a loan that was first disbursed (paid to you or on your behalf) before July 1, 1993, you may be eligible for additional deferments for such situations as teaching in a teacher shortage area, public service, being a working mother, parental leave, or temporary disability. For more information, contact your loan servicer.

 

b.      What is forbearance?  If you can’t make your scheduled loan payments, but don’t qualify for a deferment, your loan servicer may be able to grant you a forbearance.

 

c.      Discretionary Forbearance   For discretionary forbearances, your lender decides whether to grant forbearance or not.

 

You can request a discretionary forbearance for the following reasons:

·       Financial hardship

·       Illness

 

d.      Mandatory Forbearance  For mandatory forbearances, if you meet the eligibility criteria for the forbearance, your lender is required to grant the forbearance.

 

You can request a mandatory forbearance for the following reasons:

·       You are serving in a medical or dental internship or residency program, and you meet specific requirements.

·       The total amount you owe each month for all the student loans you received is 20 percent or more of your total monthly gross income (additional conditions apply).

·       You are serving in a national service position for which you received a national service award.

·       You are performing teaching service that would qualify for teacher loan forgiveness.

·       You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.

·       You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.

 

3.     Information provided on http://www.direct.ed.gov/postpone.html  for students describes deferment and forbearance eligibility as follows:

 

a.      Deferment 

 

A deferment is a postponement of payment on a loan, during which interest does not accrue if the loan is subsidized.

 

You may qualify for a deferment while you are:

·       Enrolled at least half time in an eligible postsecondary school or studying full time in a graduate fellowship program or an approved disability rehabilitation program.

·       Unemployed or meet our rules for economic hardship (limited to 3 years).

You may also be eligible for a deferment based on qualifying active duty service in the U.S. Armed Forces or National Guard. Refer to the MPN for your loan or contact your servicer for more information about specific qualifications for deferment based on military service.

In most cases, you need to submit a deferment request to your loan servicer along with documentation of your eligibility for the deferment.

If you've gone back to school and your loan servicer receives enrollment information that shows you're enrolled at least half time, it will automatically put your loans into deferment and notify you. You have the option of cancelling the deferment and continuing to make payments on your loan.

If you are in default on your loan, you are not eligible for a deferment or forbearance.

 

b.      Forbearance

If you can't make your scheduled loan payments, but don't qualify for a deferment, we may be able to give you a forbearance. A forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments, or extend the time for making payments. Some common reasons for getting a forbearance are illness, financial hardship or serving in a medical or dental internship or residency. See your copy of the Borrower's Rights and Responsibilities Statement for more examples. You can also get more information by contacting your loan servicer.

 

Under certain circumstances, we can automatically give you a forbearance, for instance, while we're processing a deferment, forbearance, cancellation, change in repayment plan or consolidation, or if you're involved in a military mobilization or a local or national emergency.

 

Authority for Deferment and Forbearance Eligibility

PART 682 – FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

34 CFR § 682.210  Deferment.  Federal regulations clearly define all deferments available for FFEL student loan borrowers and the criteria they need to fulfill for being approved for these deferment options.  The required eligibility documentation is audited by and “determination” is made by the federal student loan servicers and interpreted within the regulatory language as “the Secretary grants” and “approved by the Secretary”.  Nowhere within the regulatory language is there any reference to an institution of higher education or their third party servicer making any determination for approving or not approving a deferment for a FFEL loan.

34 CFR § 682.211  Forbearance.  Federal regulations clearly define all discretionary and mandatory forbearance options available for FFEL student loan borrowers and the criteria they need to fulfill for being approved for these forbearance options.  The required eligibility documentation is audited by and “determination” is made by the federal student loan servicers and interpreted within the regulatory language as “the Secretary grants” and “approved by the Secretary”.  Nowhere within the regulatory language is there any reference to an institution of higher education or their third party servicer making any determination for approving or not approving a deferment for a FFEL loan.

PART 685 – WILLIAM D. FORD FEDERAL DIRECT LOAN (Direct loan) PROGRAM

34 CFR § 685.204  Deferment.  Federal regulations clearly define all deferments available direct loan borrowers and the criteria they need to fulfill for being approved for these deferment options.  The required eligibility documentation is audited by and “determination” is made by the federal student loan servicers and interpreted within the regulatory language as “the Secretary grants” and “approved by the Secretary”.  Nowhere within the regulatory language is there any reference to an institution of higher education or their third party servicer making any determination for approving or not approving a deferment for a direct loan.

34 CFR § 685.205  Forbearance.  Federal regulations clearly define all discretionary and mandatory forbearance options available for direct loan borrowers and the criteria they need to fulfill for being approved for these forbearance options.  The required eligibility documentation is audited by and “determination” is made by the federal student loan servicers and interpreted within the regulatory language as “the Secretary grants” and “approved by the Secretary”.  Nowhere within the regulatory language is there any reference to an institution of higher education or their third party servicer making any determination for approving or not approving a deferment for a direct loan.

CDR Manipulation:  Who has the most to gain?

In an article titled “Government profits to soar more than $700 million with new student loan rates” by David Jesse and published by the Detroit Free Press on August 25, 2013, substantial financial gains are documented that would motivate the government to make certain changes in higher education funding.  The full article is available at http://www.freep.com/article/20130825/NEWS05/308250092/federal-government-student-loan-profits-going-up.   We have chosen highlights of the monetary impact:

“A law touted by politicians as their way of keeping money in the pockets of the nation’s college students will instead funnel more than $700 million in additional profit into the federal government’s wallet over the next 10 years, a new analysis shows.

“The law, regulating interest rates for federal student loans, was passed by Congress and signed by President Barack Obama this summer. It was hailed by politicians on both sides of the aisle as a win in the campaign to combat a rising tide of student loan indebtedness.”

“In total, the CBO projects the government to clear $175 billion in profit over the next decade on student loans.”

Information published by the U.S. Department of Education for the FY 2009 3-year Cohort Default Rates shows data for the “Top 100 Loan Holders” Department of Education portfolios as substantially higher in defaults and default rates than that commonly published in the “FY 2009 3-year CDR for Direct Loans” and much higher than the national average.

 

Where did the 49,606 borrowers who were reported in the “Top 100 Loan Holders” and missing from the Direct Loan chart go?  They obviously had a drastic impact on the Department’s cohort default rate and taxpayer’s interests.

Then, we should consider the motivation for federal loan servicers.  When millions of students are involved, it takes years to change a default rate and, yet, the servicer who was historically in last place moved to first place in one year.  Here are the two federal servicers most affected from the 3^rd to the 4^th allocation years.

 

In 26 years of default management experience, I have never seen a default rate cut in half in one year.  High volume would make this even more difficult. 

There is minimal change in allocation numbers from the 4^th to the 5^th year.  The quarterly servicing results, however, are showing aggressive strategies by Sallie Mae to recapture a larger piece of the servicing.  In a year-over-year comparison of June 2013 to June 2012 quarterly results, Sallie Mae has reduced its default rate by half.  In June 2012, Sally Mae’s results were 1.08% compared to June 2013 where they were 0.54%.

Lastly, we have the schools.  An institution’s ability to get federal loan and grant funds is dependent upon their cohort default rates.  For 2-year rates, the schools lose eligibility with one year over 40% or 3 most recently published consecutive years over 25%.  For 3-year rates, the schools lose eligibility with one year over 40% or 3 most recently published consecutive years over 30%.  The 3-year sanctions will apply when there are 3 official 3-year cohort default rates.

Schools are mandated to perform very specific borrower education at entrance and exit counseling with student borrowers.  Part of this is explaining the rights and responsibilities of having student loans including deferment and forbearance options.  Schools have absolutely no authority to approve or deny the borrower’s requests for these options – they are only responsible for educating the borrowers about them.  The Secretary and the federal loan servicers are solely responsible for approving or denying the borrower’s request for deferment or forbearance.  If properly documented, deferments and certain types of forbearance are an entitlement to the student loan borrowers.  In other words, if the borrower provides the appropriate documentation for eligibility, these deferments and forbearances must be applied to the loans.  The other discretionary forbearances are approved by the Secretary and federal loan servicers.

Institutions serving at-risk populations definitely want to maintain eligibility for federal student loans and grants.  As community colleges enroll more of these students in the wake of bad publicity for the proprietary sector, they will be more vested in the outcomes of their cohort default rates. 

There are tremendous numbers of borrowers with student loan debt totaling over 1 trillion dollars.  Fraud and abuse should be stopped at all institutions and companies involved with student loans.  Limiting the focus to for-profit institutions that have an average of 470 borrowers per institution (2,142 institutions and 1,006,190 borrowers) in the FY 2009 3-year CDR does not fully serve the students or the fiscal interest.  Large federal loan servicing companies manipulating default rates to gain hundreds of thousands of borrower accounts is a more likely reality than somehow interpreting effective borrower education by for-profit institutions into CDR manipulation. 

And we ask again, “CDR Manipulation:  Who is REALLY responsible?”

REFERENCE NOTE:  The data contained in this article was the most recent publicly available at the time the article was written.  The official 2011 2-year CDR and 2010 3-year CDR data was not yet publicly posted.

 

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