University Business - March 2010 - (Page 20)

FINANCIAL AID A New Formula for Cohort Default Rates What aid administrators need to know By Haley Chitty HE FEDERAL GOVERN ment is implementing a new method of assessing student loan default rates that will make it tougher for higher education institutions to remain eligible to receive federal student aid funds. Currently, the Department of Education tracks how many student loan borrowers default within the first two years of repayment to determine the official Cohort Default Rate (CDR). A provision in the Higher Education Opportunity Act (HEOA) alters the CDR formula by adding an additional year. Until there are three years of three-year rates, there will be a transition period during which institutions will receive both two-year and three-year rates, and sanctions based on a high CDR will be based on an institution’s official two-year rate. Beginning in late 2014, the DOE will use the percentage of borrowers that default within the first three years of repayment to determine the CDR and will impose penalties on institutions that have official threeyear CDRs above a certain level. In December, the DOE released unofficial, trial three-year CDRs to help institutions prepare for the change that will become fully effective in September 2014. e three-year rates were higher than two-year rates across all types of institutions. For-profit colleges’ threeyear rates were 93 percent higher than two-year rates; public two-year colleges’ three-year rates were 63 percent higher, and private four-year colleges’ three-year 20 | March 2010 T The Department of Education will impose penalties for institutions with three-year CDRs above a certain level. rates were 70 percent higher. Among all borrowers, the average two-year default rate was 6.7 percent in 2007. is percentage jumps to nearly 12 percent when a three-year default rate is used. To compensate for the anticipated increase in CDRs, lawmakers also eased the minimum CDR requirements institutions must meet to remain eligible to participate in the federal loan and Federal Pell Grant programs. e HEOA increased the CDR threshold schools must remain below for its three most recent CDRs to remain eligible from 25 to 30 percent. is new threshold becomes effective when the new formula is fully implemented. e law also makes it easier for institutions with a relatively low percentage of borrowers to appeal the potential loss of eligibility by increasing the participation rate index threshold from .0375 to .0625. A school’s participation rate index is calculated based on the number of students who obtain loans compared to the number of regular students at the school. In other words, if a low percentage of a school’s students take out loans and the school’s participation rate index is equal to or less than the threshold, that school does not lose its eligibility. Despite the increase caused by using three years, only a small percentage of colleges would face penalties for Haley Chitty is director of communications for the National Association of Student Financial Aid Administrators,

Table of Contents for the Digital Edition of University Business - March 2010

University Business - March 2010
Editor’s Note
College Index
Company Index
Advisory Board
Behind the News
Sense of Place
Financial Aid
Human Resources
Money Matters
Community Colleges as Economic Saviors
Web Content Needs - Solved
Paths to the Presidency
What’s New
End Note

University Business - March 2010