Default Management and its Growing Importance

Why institutions of higher education should manage cohort default rates

When the Higher Education Act was initially brought to the table in 1965, it focused on two objectives: strengthening the resources available to institutions of higher education and providing financial support to students in postsecondary education. Many changes have been made to the HEA since its first incarnation just before the days of sit-ins and flower power. Of those, few have sparked controversy like the recent Cohort Default Rate Amendment.
Often referred to as the Grijalva-Bishop Amendment, coined for Arizona’s Mr. Grijalva and Mr. Bishop of New York, this amendment "will increase the cohort default rate for all sectors of education. Hundreds of institutions may lose Title IV eligibility, and at least 750,000 students may lose disbursement benefits," according to an article in December’s Career Education Review by Sandy Watts.
A cohort default rate is the percentage of a school’s borrowers who enter repayment on certain loans secured through Title IV student financial assistance programs during a particular fiscal year and default on those repayments prior to the end of that fiscal year.
Title IV student financial assistance programs include the William D. Ford Federal Direct Loan (Direct Loan) and Federal Family Education Loan (FFEL) programs. Without access to these programs, some students will not be able to afford the cost of attaining the advanced education needed to begin a career.
The Grijalva-Bishop Amendment
According to Mary Lyn Hammer, CEO of Champion College Solutions, a default management company, the Grijalva-Bishop Amendment will affect future default rates in two main ways: the change in cohort default rate definition and student loan information access legislation.
The amendment changes the definition of the CDR by adding an additional year to the preexisting two-year designation. However, the wording of the amendment describes a four-year definition rather than the intended three.
Although the new CDR definition would encourage growth in Hammer’s own business, she is against it because it hurts the students and institutions she has served for 20 years.
"It is bad public policy," she said. "Participation rate index exemptions have historically allowed many public institutions with low borrower counts to remain eligible for Federal Pell and Student Loans. This exemption does not apply to disbursement benefits for institutions with historical CDRs under 10 percent. That will be over 10 percent under the new legislation."
The second piece of legislation focuses on the access to student loan information. If passed by both the House and Senate, it will ensure that schools and their agents have timely and accurate information at no cost.
Schools must provide information to lenders and servicers, but often these entities do not provide reciprocal information. When schools are held accountable for their default rate, this two-way exchange of information becomes more important. As the default rate time period increases, institutions of higher education must ensure their cohort default rates remain under 10 percent or face the penalty of losing Title IV funding.
"We need legislation that mandates student loan information sharing at no cost to the schools and/or any third party performing default prevention. Without it, default rates will drastically increase," Hammer said.
Without access to loan information, schools are unable to help some students understand the financial obligations and consequences of student loan defaults.
As schools are increasingly being held accountable for their students finding employment after graduation and keeping current on their student loans, default management is becoming increasingly critical.
Default management plan
The Information for Financial Aid Professionals Library section of the government’s education web site ( shows an example of a default management plan schools can take advantage of. Benefits are seen by both the schools and the students when proactive measures are taken regarding default management.
According to the web site, "Schools benefit by avoiding any limitations on participation in the loan programs due to excessive cohort default rates (CDRs). Students benefit by having continued access to Title IV student financial assistance programs, learning good debt management practices and establishing a healthy credit history."
Open communication about financing education and the ramifications of defaulting on a loan are critical pieces of knowledge that schools can provide to their students. Managing money at this juncture in life may be difficult for some, but providing this important information up-front may be crucial to a student’s future. Modifying the current legislation to promote access to vital information would help the very students who "are the reason the Higher Education Act was written in the first place," according to Hammer.

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