Beyond the Numbers: Why Schools Shouldn't Be Lulled by 0% Cohort Default Rates

Cohort default rates (CDRs) are one of the tools the U.S. Department of Education (ED) uses for holding U.S. colleges and universities accountable for their students’ ability to repay their federal student loans. Every year, ED publishes CDRs based on the percentage of a school’s borrowers who enter repayment on Federal Direct Loan Program loans during a federal fiscal year (i.e., Oct. 1-Sept. 30) and default within three years of beginning repayment (Source: nasfaa.org). The idea behind this calculation is that it measures how well schools are setting up their students for success. Student loan borrowers who struggle to repay their student loans may not have received the education or support needed to establish a good career that provides the income needed to thrive outside of school. 

School Sanctions 

When it comes to high CDRs, colleges have more to worry about than just damage to their reputation. They also have to worry about potentially losing Direct Loan and Federal Pell Grant program eligibility for a set time period through sanctions set by ED. The way the sanctions are currently set up is if a school’s three most recent official CDRs are 30% or higher for the three-year calculation, the school will lose Federal Direct Loan Program and Federal Pell Grant Program eligibility for the remainder of the fiscal year in which the school is notified and for the following two fiscal years (Source: fsapartners.ed.gov). The same sanctions are applied if a school’s current official CDR is higher than 40% for the three-year calculation (Source: fsapartners.ed.gov). For this latter group, this means only one official CDR could terminate their participation in the program for multiple years to come. The impact to a school that can no longer offer federal student loans could be devastating given that over 50% of students who complete an undergraduate program use federal loans at some point to do so (Source: educationdata.org). 

CDR Trends 

CDRs have been steadily decreasing over the last decade where the highest national rate reported was 11.5% for the fiscal year of 2014 (Source: fsapartners.ed.gov). Initially, a lot of the decrease could be attributed to colleges putting a new focus on student loan repayment and default prevention. However, those best practices, while incredibly valuable, aren't what's impacting the historically low rates schools are seeing this year. Many schools started to celebrate when ED released reports for the 2019 fiscal year reflecting a 5% drop in the national rate (Source: fsapartners.ed.gov). And when the report for 2020 was released in August 2023 showing the national cohort default rate was down to 0%, some schools may have started to feel a false sense of security (Source: fsapartners.ed.gov). 

Behind the Numbers 

The reality is the current CDRs are not a reflection of efforts made by the schools or of borrowers feeling a new sense of responsibility towards their student loans. Today’s CDRs are a direct result of the payment pause put in place on Direct loans and other federal student loans held by ED in response to the COVID-19 health crisis from March 2020 until September 2023. As a result, there were no new defaults during the payment pause on any ED held student loans (Source: https://blog.ed.gov). 

Looking Ahead 

A 0% cohort default rate can be expected for the next few years, as the current administration’s on-ramp to repayment is preventing delinquency until fall 2024 (Source: studentaid.gov). Once borrowers are at risk of delinquency, default becomes a possibility about one year later, since student loans cannot default until they are 360 days delinquent. This leaves many people in the industry speculating on what happens next and others predicting a large volume of imminent defaults ahead for the 2025 cohort period. Those predictions don’t seem far off since a few months after the payment pause came to an end last fall, reports indicated only 60% of borrowers made payments when bills resumed (Source: https://www.cnbc.com). 

President Biden and ED have announced a number of changes that could positively impact borrowers going forward, like the latest Income-Driven Repayment plan called Saving on a Valuable Education (SAVE) and the latest debt relief plan announced in April. However, many borrowers feel lost trying to navigate through all the changes and others worry those filing lawsuits challenging the changes will prevail. With so much uncertainty, schools need to continue to focus on student loan repayment and default prevention just as much as ever and ignore their current 0% cohort default rates. 

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