Audit to Determine if Cohort Default Rates Provide Sufficient
Information on Defaults in the Title IV Loan Programs

FINAL AUDIT REPORT

## 

## 

## 

## 

## ED-OIG/A03-C0017

### [December 2003]{.smallcaps}

![](media/image2.png)

Our mission is to promote the efficiency, U.S. Department of Education

effectiveness, and integrity of the Office of Inspector General

Department's programs and operations. Philadelphia, Pennsylvania

> NOTICE
>
> Statements that managerial practices need improvements, as well as
> other conclusions and recommendations in this report represent the
> opinion of the Office of Inspector General. Determinations of
> corrective action to be taken will be made by the appropriate
> Department of Education officials.
>
> In accordance with Freedom of Information Act (5 U.S.C. § 552),
> reports issued by the Office of Inspector General are available to
> members of the press and general public to the extent information
> contained therein is not subject to exemptions in the Act.

DEC. 22, 2003

**Memorandum**

**TO:** Sally Stroup

Assistant Secretary for Postsecondary Education

Lead Action Official

Theresa S. Shaw

Chief Operating Officer

Federal Student Aid

**FROM:** Helen Lew /s/

Assistant Inspector General for Audit Services

**SUBJECT:** Final Audit Report

> "Audit to Determine if Cohort Default Rates Provide Sufficient
> Information on Defaults in the Title IV Loan Programs."

Control Number ED-OIG/A03-C0017

Attached is the subject final audit report that covers the results of
our review of default rates for the 1996 through 1999 cohorts. An
electronic copy has been provided to your Audit Liaison Officers. We
received your comments, in which you did not disagree with our findings
but raised concerns about our recommendations.

Corrective actions proposed (resolution phase) and implemented (closure
phase) by your offices will be monitored and tracked through the
Department's automated audit tracking system. ED policy requires that
you develop a proposed Corrective Action Plan (CAP) in the automated
system within 60 days of the issuance of this report. The CAP should set
forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and
recommendations contained in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the
Office of Inspector General is required to report to Congress twice a
year on the number of audits unresolved. In addition, any reports
unresolved after 180 days from the date of issuance will be shown as
overdue in our reports to Congress.

In accordance with the Freedom of Information Act (5 U.S.C. §552),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us during this review. If you have
any questions, please call Bernard Tadley, Regional Inspector General
for Audit, at (215) 656-6279.

######## Attachment 

[Audit to Determine if Cohort Default Rates]{.smallcaps}

[Provide Sufficient Information on Defaults]{.smallcaps}

[in the Title IV Loan Programs]{.smallcaps}

[ED-OIG/A03-C0017]{.smallcaps}

[Table of Contents]{.smallcaps}

Page

+---------------------------------------------------------------+------+
| Executive                                                     | 1    |
| Summary.................                                      |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Background............................                        | 4    |
| ........................................................\.... |      |
+---------------------------------------------------------------+------+
| > Loan Programs under Title IV of the                         | 4    |
| > HEA............................................             |      |
+---------------------------------------------------------------+------+
| > Implementing Cohort Default                                 | 4    |
| > Rates....................................................   |      |
+---------------------------------------------------------------+------+
| > Uses of Cohort Default                                      | 5    |
| > Rates                                                       |      |
| .........................................................\... |      |
+---------------------------------------------------------------+------+
| > Calculating Cohort Default                                  | 6    |
| >                                                             |      |
|  Rates....................................................... |      |
+---------------------------------------------------------------+------+
| > History of                                                  | 6    |
| > Defaults.............                                       |      |
| ........................................................\.... |      |
+---------------------------------------------------------------+------+
| > Definition of                                               | 7    |
| > Default.........                                            |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Audit                                                         | 9    |
| Results.........................                              |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| [Finding No. 1]{.underline} -- Cohort Default Rates Do Not    | 9    |
| Appear to Reflect General Trends in Defaults in Year          |      |
| Following Two-Year Cohort                                     |      |
| Period.................\.......................               |      |
+---------------------------------------------------------------+------+
| > Adjusted Default                                            | 10   |
| > Rates......                                                 |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
| > Third-Year Default                                          | 12   |
| > Rates...                                                    |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
| > Three-Year Default                                          | 15   |
| > Rates...                                                    |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
| Recommendations\.....................                         | 18   |
| .........................................................\... |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| [Finding No. 2]{.underline} -- Borrowers in Deferment and     | 20   |
| Forbearance Lower Schools' Cohort Default                     |      |
| Rates.............................                            |      |
| .......................................\.................\... |      |
+---------------------------------------------------------------+------+
| > Percentage of Borrowers in Deferment or                     | 21   |
| > Forbearance..............................                   |      |
+---------------------------------------------------------------+------+
| > Alternative Default                                         | 23   |
| > Rates....                                                   |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
| > Alternative/Adjusted Default                                | 24   |
| > Rates.....................................................  |      |
+---------------------------------------------------------------+------+
| Recommendations\.....................                         | 27   |
| .........................................................\... |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Other                                                         | 28   |
| Matters..........................                             |      |
| .........................................................\... |      |
+---------------------------------------------------------------+------+
| > Other Reasons Cohort Default Rates May Not Provide          | 28   |
| > Sufficient                                                  |      |
| > Information....................                             |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
| > Effect of Change in Definition of Default on Reducing       | 28   |
| > Defaults\...................                                |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Objective, Scope and                                          | 30   |
| Methodolog                                                    |      |
| y............................................................ |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Appendix A --Gross Default Rates by Risk                      | A-1  |
| Category........................................              |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Appendix B -- Default                                         | B-1  |
| Data........                                                  |      |
| ............................................................. |      |
+---------------------------------------------------------------+------+
|                                                               |      |
+---------------------------------------------------------------+------+
| Appendix C - Department's Comments to the                     | C-1  |
| Report....................................\...                |      |
+---------------------------------------------------------------+------+

# Executive Summary

The objective of our audit was to determine if cohort default rates, as
calculated under the Higher Education Act of 1965, as amended (HEA),
provide sufficient information on defaults in the Title IV loan
programs. Cohort default rates provide sufficient information to the
Department of Education (Department), Congress, and other decision
makers if they provide comprehensive, complete, and accurate information
that reflects general trends in defaults.

To accomplish our objective, we gathered and analyzed data about
borrowers in the 1996 through 1999 cohorts: we identified borrowers in
each cohort who defaulted in the 90-day and one-year periods immediately
following the end of the two-year cohort period,[^1] and we identified
borrowers in each cohort whose loans were in a deferment or forbearance
on the last day of the two-year cohort period.

Although cohort default rates provide the information required under the
HEA, they do not appear to provide decision-makers with sufficient
information on defaults in the Title IV loan programs. Specifically, we
identified two findings:

1.  *Cohort default rates do not appear to reflect general trends in
    defaults in the year following the two-year cohort period*.

-   ![](media/image3.wmf)The Higher Education Amendments of 1998 (1998
    Amendments) changed the definition of default for loans for which
    the first day of delinquency occurred on or after October 7, 1998,
    from a 180-day delinquency to a 270-day delinquency. To examine this
    change's impact, we adjusted the 1998 and 1999 cohort default rates
    to account for the 90 days added to the delinquency period. We found
    that the definition's change may have resulted in the 1998 and 1999
    cohort default rates' being materially lower than they would have
    been, if they had been calculated using the previous definition of
    default.

    -   Default trends during the third year (the fiscal year
        immediately following the two-year cohort period) were not
        always similar to trends of cohort default rates. As Graph S-1
        shows, the 1997 through 1999 cohort default rates decline each
        year, but the third-year rates for the same cohorts increase.

    -   The distribution of defaults over a three-year cohort period
        (the two-year cohort period combined with the following one-year
        period) changed by a material amount from the 1996 to 1999
        cohorts: 70.1 percent of the cohort borrowers who defaulted
        during the 1996 three-year cohort period defaulted in the first
        two years, while only 61.6 percent of the cohort borrowers who
        defaulted during the 1999 three-year cohort period defaulted in
        the first two years.

2.  ![](media/image4.wmf)*Borrowers in deferment and forbearance lower
    schools' cohort default rates*.

> In 1999, the General Accounting Office (GAO) found that the percentage
> of borrowers with loans in deferment or forbearance more than doubled
> between 1993 and 1996, from 5.2 percent to 11.3 percent.[^2] Though
> our numbers were different than GAO's, we identified the same trend:
> the percentage of borrowers with loans in deferment or forbearance
> more than doubled between the 1996 and 1999 cohorts, from 10.1 percent
> to 21.7 percent. (See Graph S-2.) If these borrowers were excluded
> entirely from the 1996 through 1999 cohort default rate
> calculations---because the borrowers were not making payments during
> the cohort default period, and could not default---the effect would be
> a material increase in cohort default rates for those years.

Changes to the definition of default and repayment practices have
materially reduced schools' cohort default rates, while threshold
percentages for schools' ineligibility have remained unchanged since
1994. For example, because the change in the definition of default
increased the number of days it takes for a borrower to default, some
borrowers may not be included as defaulters in the cohort default rate
calculation, even though they never make a payment on their loans and
default at the first opportunity.

We recommend that the Assistant Secretary for Postsecondary Education
and the Chief Operating Officer for Federal Student Aid support
amendments to the HEA, that would

-   *Include* defaults in the cohort default rate calculation that have
    been excluded by the 1998 Amendments' change to the definition of
    default, and

-   *Exclude* borrowers who are in deferment or forbearance status from
    cohort default rate calculations until the deferment and forbearance
    ends and they are subject to a default risk on their loans.

We also recommend that the Department calculate and publish a
life-of-cohort default rate for each cohort, to better identify the
trends in cohorts' defaults after the two-year cohort period has ended.

A draft of this report was provided to the Office of Postsecondary
Education (OPE) and Federal Student Aid (FSA) for review and comment. In
its comments on the draft report, developed with FSA, OPE did not
disagree with our findings, but noted concerns with our recommendations.
We have incorporated OPE's comments, where appropriate, into the report
and provide their full response in Appendix C.

# Background

####### Loan Programs under Title IV of the HEA

The Department administers the William D. Ford Federal Direct Loan
(Direct Loan) Program and Federal Family Education Loan Program (FFELP)
to help students finance the costs of higher education. The Direct Loan
Program and FFELP are authorized under Title IV of the HEA. The
Department makes Direct Loan Program loans directly to borrowers and
guarantees all or a portion of FFELP loans made by participating lending
institutions for students' attendance at eligible institutions of higher
education. Eligible institutions of higher education include public and
private two- and four-year schools, graduate schools, and vocational
training schools. Students and their parents may be eligible to receive
loans. Student borrowers who demonstrate financial need may receive
federal interest subsidies on their loans.

The federal government makes Direct Loan Program loans directly to
students and parents, through participating schools. Direct Loans are
originated and serviced through contracts with private vendors. Under
the FFELP, over 4,000 financial institutions make loans to students and
parents. FFELP loans are guaranteed by the federal government against
default, with 36 state or non-profit guaranty agencies acting as
intermediaries in administering the loan guarantees.

Both the Direct Loan Program and FFELP offer the following types of
loans:

-   Subsidized loans to students. Subsidized loans are based upon
    students' financial need. The federal government subsidizes the
    interest accruing on the loan before students begin repayment or
    while they are in deferment.

-   Unsubsidized loans to students. Unsubsidized loans are not based
    upon financial need. Interest on an unsubsidized loan accrues from
    the time the loan is disbursed until it is paid in full.

-   PLUS loans to parents, for children who are dependent undergraduate
    students.

-   Consolidation loans, to allow student or parent borrowers to combine
    several types of federal loans into one loan.

####### Implementing Cohort Default Rates

In 1987, the Department was concerned that increasing student loan
default costs were undermining public confidence in the loan programs. A
study found about 950 schools had fiscal year (FY) 1985 default rates
greater than 40 percent. The Department had taken actions to control
loan defaults by implementing default prevention and collection
activities, including use of private collection agencies, use of salary
offsets, notifying credit bureaus, use of IRS tax refund offsets, and
increasing lender and guaranty agency due diligence requirements.

The Department also sought statutory changes to broaden loan
consolidations and to allow the use of the National Student Loan Data
System (NSLDS) to verify borrower eligibility. To further control loan
defaults, the Department issued regulations to hold schools responsible
for keeping loan program default rates of student borrowers who attend
their institutions below a specified threshold for the first two years
of repayment. A school's default rate that exceeds the threshold
indicates that the school may not have adequate institutional capability
to administer the loan programs and may pose an unreasonable risk of
loss to taxpayers. Congress added sanctions based on cohort default
rates to the HEA in 1990.

####### 

####### Uses of Cohort Default Rates

Cohort default rates help save taxpayers money because they are an
indicator of a school's ability to properly administer the Title IV
programs, and because high rates affect the school's eligibility under
the HEA and the regulations. Cohort default rates provide an incentive
to schools to work with their borrowers to reduce defaults.

Under Sections 401(j)(1) and 435(a) of the HEA and 34 C.F.R. §
668.187(a)(2), if a school's three most recent cohort default rates are
25 percent or greater, that school loses its eligibility to participate
in the FFELP, Direct Loan, and Federal Pell Grant programs for the
remainder of the current FY and for the two following FYs. Under 34
C.F.R. § 668.187(a)(1), if a school's most recent cohort default rate is
greater than 40 percent, the school loses its eligibility to participate
in the FFELP and Direct Loan Program for the remainder of the current FY
and for the two following FYs.[^3]

Schools with low cohort default rates are eligible for an exemption from
certain requirements. If a school's most recent cohort default rate is
less than 5 percent, the school may deliver loan proceeds in a single
installment to a student studying abroad. Until September 30, 2002, if a
school's three most recent cohort default rates were less than 10
percent, the school was able to deliver loan proceeds in a single
installment or chose not to delay the delivery of the first installment
of a loan for first-time, first-year borrowers. Neither the Department's
nor Federal Student Aid\'s current Performance Plans include cohort
default rates as a performance indicator or measure.

The Department uses a default rate as a partial basis for its estimate
of loan program subsidy rates. Loan program subsidy rates are the
federal portion of non-administrative costs (principally interest
subsidies and defaults) associated with each borrowed dollar, and are
used to develop loan program cost estimates. The default rates used by
the Department to develop loan program cost estimates, provided in
Appendix A to this report, represent projected defaults over the life of
the loan cohort and are not the same as cohort default rates calculated
under the HEA.

**[Calculating Cohort Default Rates]{.underline}**

Cohort default rates are calculated using formulas established in
Section 435(m) of the HEA and promulgated in regulations at 34 C.F.R.
Part 668, Subpart M. If a school has 30 or more borrowers entering
repayment, the cohort default rate is calculated as follows:

> The number of borrowers who enter repayment in the cohort FY
>
> and who default by the end of the following FY.
>
> The number of borrowers who enter repayment in the cohort FY.

If a school has 29 or fewer borrowers entering repayment, the cohort
default rate is calculated as follows:

#### The number of borrowers who enter repayment in the 

#### cohort FY and the two preceding FYs and who default 

#### by the end of the FY immediately following the

#### cohort FY in which they entered repayment.

> The number of borrowers who enter repayment in
>
> the cohort FY and the two preceding cohort FYs.

Students with subsidized and unsubsidized FFELP and Direct Loan Program
loans and Federal Supplemental Loans for Students (which have not been
made since July 1, 1994) are included in the cohort default rate
calculation. Borrowers are not included in the cohort default rate
calculation on the basis of PLUS loans or Federal Insured Student Loans.
Consolidation loan borrowers are included only on the basis of the loans
that were repaid by the Consolidation loan.

####### 

####### History of Defaults 

Cohort default rates have declined significantly since the late 1980's
and early 1990's, as exhibited in the following graph:

![](media/image5.wmf)

Source: U.S. Department of Education, Federal Student Aid, September
2002.

Despite this decline in cohort default rates, the total dollar amount of
defaults outstanding continued to increase because the total dollar
amount of loans outstanding continued to increase.[^4] During the period
from the end of FY 1995 to the end of FY 1999 the amount of loans in
default grew at a slower rate than the amount of loans outstanding. The
amount of loans in default increased 26 percent, from approximately \$18
billion at the end of FY 1995 to approximately \$22.6 billion at the end
of FY 1999. During the same period, the amount of loans outstanding
increased 76 percent, from approximately \$114 billion at the end of FY
1995 to approximately \$201 billion at the end of FY 1999. The total
dollar amount of loans in default and loans outstanding is provided in
the following table:

+--------------------------+-------+-------+-------+-------+-------+
| ## Table 1               |       |       |       |       |       |
+--------------------------+-------+-------+-------+-------+-------+
| **Cumulative Amount of   |       |       |       |       |       |
| Defaulted Loans Held by  |       |       |       |       |       |
| the Department and       |       |       |       |       |       |
| Guaranty Agencies**      |       |       |       |       |       |
|                          |       |       |       |       |       |
| **(in millions of        |       |       |       |       |       |
| dollars)**               |       |       |       |       |       |
+--------------------------+-------+-------+-------+-------+-------+
| ### Fiscal Yea           | **1   | **1   | **1   | **1   | **1   |
| r Ended September 30^th^ | 995** | 996** | 997** | 998** | 999** |
+--------------------------+-------+-------+-------+-------+-------+
| Subsidized               | \$1   | \$1   | \$1   | \$1   | \$1   |
|                          | 3,678 | 2,290 | 3,610 | 4,472 | 5,376 |
+--------------------------+-------+-------+-------+-------+-------+
| Unsubsidized             | \$56  | \$100 | \$376 | \$782 | \$    |
|                          |       |       |       |       | 1,307 |
+--------------------------+-------+-------+-------+-------+-------+
| PLUS                     | \$    | \$    | \$    | \$    | \$    |
|                          | 1,118 | 1,063 | 1,298 | 1,376 | 1,070 |
+--------------------------+-------+-------+-------+-------+-------+
| Supplemental Loans for   | \$    | \$    | \$    | \$    | \$    |
| Students                 | 3,096 | 3,151 | 3,181 | 3,125 | 2,985 |
+--------------------------+-------+-------+-------+-------+-------+
| Consolidation            | \$29  | \$133 | \$383 | \$941 | \$    |
|                          |       |       |       |       | 1,898 |
+--------------------------+-------+-------+-------+-------+-------+
| **Total Defaulted        | **    | **    | **    | **    | **    |
| Loans\***                | \$17, | \$16, | \$18, | \$20, | \$22, |
|                          | 976** | 738** | 847** | 697** | 637** |
+--------------------------+-------+-------+-------+-------+-------+
| **Cumulative Amount of   |       |       |       |       |       |
| Loans Outstanding and in |       |       |       |       |       |
| Default**                |       |       |       |       |       |
|                          |       |       |       |       |       |
| **(in millions of        |       |       |       |       |       |
| dollars)**               |       |       |       |       |       |
+--------------------------+-------+-------+-------+-------+-------+
| ### Fiscal Year          | **1   | **1   | **1   | **1   | **1   |
|  Ended September 30^th^  | 995** | 996** | 997** | 998** | 999** |
+--------------------------+-------+-------+-------+-------+-------+
| Subsidized               | \$7   | \$8   | \$8   | \$9   | \$10  |
|                          | 5,878 | 0,798 | 9,251 | 7,185 | 2,554 |
+--------------------------+-------+-------+-------+-------+-------+
| Unsubsidized             | \$1   | \$1   | \$2   | \$3   | \$4   |
|                          | 0,040 | 7,374 | 6,084 | 5,297 | 3,403 |
+--------------------------+-------+-------+-------+-------+-------+
| PLUS                     | \$    | \$    | \$    | \$1   | \$1   |
|                          | 6,481 | 7,607 | 9,144 | 0,635 | 1,461 |
+--------------------------+-------+-------+-------+-------+-------+
| Supplemental Loans for   | \$1   | \$    | \$    | \$    | \$    |
| Students                 | 0,477 | 9,292 | 8,303 | 7,474 | 6,537 |
+--------------------------+-------+-------+-------+-------+-------+
| Consolidation            | \$1   | \$1   | \$2   | \$2   | \$3   |
|                          | 1,176 | 6,039 | 0,212 | 5,466 | 7,055 |
+--------------------------+-------+-------+-------+-------+-------+
| **Total Outstanding      | **\   | **\   | **\   | **\   | **\   |
| Loans\***                | $114, | $131, | $152, | $176, | $201, |
|                          | 053** | 110** | 993** | 058** | 010** |
+--------------------------+-------+-------+-------+-------+-------+
| \*Amounts may not add    |       |       |       |       |       |
| due to rounding.         |       |       |       |       |       |
|                          |       |       |       |       |       |
| *Source: U.S. Department |       |       |       |       |       |
| of Education, Office of  |       |       |       |       |       |
| the Under Secretary,     |       |       |       |       |       |
| Budget Service*          |       |       |       |       |       |
+--------------------------+-------+-------+-------+-------+-------+

####### Definition of Default

The 1998 Amendments amended Section 435(l) of the HEA to change the
definition of default for loans for which the first day of delinquency
occurred on or after October 7, 1998, from a 180-day delinquency to a
270-day delinquency.

For purposes of calculating cohort default rates, a FFELP borrower is
generally considered to be in default if an insurance claim is paid on
the borrower's loan during the two-year cohort period.[^5] For Direct
Loans, specific timeframes are included in 34 C.F.R. § 668.183 to
determine if a Direct Loan is considered to be in default for cohort
default rate purposes. Since there is usually a 90-day period between
the date a FFELP loan defaults and the date the insurance claim is paid
to the lender, a corresponding 90-day period is included in the
timeframe for Direct Loan defaults.

As a result of changes in the definition of default, the timeframe for
considering a borrower in default for cohort default rate purposes on a
FFELP loan increased from about 270 days (180 days delinquency plus
about 90 days to pay the claim) to about 360 days (270 days delinquency
plus about 90 days to pay the claim), and the timeframe for considering
a borrower to be in default for cohort default rate purposes on a Direct
Loan increased from 270 days to 360 days.

The change in the definition of default impacted cohort default rates in
a number of ways. For example, the change in the definition of default
may enable a borrower who never makes a payment on his or her loan to be
excluded from the cohort default rate calculation:

-   Under the previous, 180-day definition of default, it would take
    about 330 days for a borrower to be considered in default and
    included in the numerator of a cohort default rate calculation. (60
    days until the first scheduled payment is due[^6] + 270 days to
    default = 330 days.) Since 330 days is *less* than a year, it may
    have been possible for the last borrower in the cohort who makes no
    payments to default before the end of the following fiscal year.

-   Under the current, 270-day definition of default, it would take
    about 420 days for a borrower to be considered in default and
    included in the numerator of a cohort default rate calculation (60
    days until the first scheduled payment is due + 360 days to default
    = 420 days.) Since 420 days is *more* than a year, it may not be
    possible for some of the last borrowers in the cohort who make no
    payments to default before the end of the following fiscal year.

# Audit Results

The objective of our audit was to determine if cohort default rates, as
calculated under the HEA, provide sufficient information on defaults in
the Title IV loan programs. Cohort default rates provide sufficient
information to the Department, Congress, and other decision makers if
they provide comprehensive, complete, and accurate information that
reflects general trends in defaults.

Our audit covered the 1996 through 1999 two-year cohort periods and the
FY following each two-year cohort period. Although cohort default rates
provide the information required under the HEA, they do not appear to
provide decision makers with sufficient information on defaults in the
Title IV loan programs. Changes to the definition of default and
repayment practices have materially reduced schools' cohort default
rates, while threshold percentages for schools' ineligibility have
remained unchanged since 1994.

Without information that reflects the general trends in defaults,
schools may continue to participate in Title IV programs, even though a
significant percentage of the schools' students may default on their
loans. Defaulted student loans cost taxpayer money. Default rates that
provide improved information on student loan defaults may allow the
Department to terminate or suspend marginal schools' eligibility to
participate in Title IV programs, thereby reducing the risk of loss to
taxpayer funds.

# Finding No. 1 - Cohort Default Rates Do Not Appear to Reflect General Trends in Defaults in Year Following Two-Year Cohort Period

As described in this section, we used data we obtained for defaults that
occurred after the two-year cohort period ended to calculate other types
of default rates: adjusted default rates, third-year default rates, and
three-year default rates. Based on our analysis of these other types of
default rates, cohort default rates calculated under the HEA do not
appear to reflect general trends in defaults in the year following the
two-year cohort period.

As a result, cohort default rates do not appear to provide decision
makers with sufficient information on defaults in the Title IV loan
programs. Cohort default rates do not capture information on defaults
beyond the two-year cohort period, because the HEA specifies that cohort
default rates only include defaults that occur during the FY in which
the borrower enters repayment and in the following FY. Without
information that reflects the general trend in defaults, schools may
continue to participate in Title IV programs even though a significant
percentage of their students may default. Defaulted student loans cost
taxpayers money.

####### Adjusted Default Rates

As noted in the Background section, the 1998 Amendments amended Section
435(l) of the HEA to change the definition of default for loans for
which the first day of delinquency occurred on or after October 7, 1998,
from a 180-day delinquency to a 270-day delinquency.

If other factors affecting the timing of borrower default remained
constant, the change in the definition of default affected the 1998 and
later cohort default rate calculations by removing defaults that would
have been recognized during the last 90 days of the two-year cohort
period under the previous, 180-day definition: some delinquent borrowers
who would have been counted as defaulters under the prior definition are
no longer counted.

-   Under the 180-day definition, a borrower would have to become
    delinquent by about January 4 of the second fiscal year in the
    two-year cohort period in order to be counted as a defaulter
    (January 4 + 180 days to default + 90 days for the FFELP claim or
    Direct Loan equivalent = September 30).

-   Under the 270-day definition, a borrower would have to become
    delinquent 90 days earlier, on about October 6 of the second fiscal
    year, in order to be counted as a defaulter (October 6 + 270 days to
    default + 90 days for the FFELP claim or Direct Loan equivalent =
    September 30).

To determine the impact of the change in the definition of default on
cohort default rates, we identified borrowers who defaulted in the
90-day period following the two-year cohort periods, and we included
those defaulters when calculating adjusted default rates for the 1998
and 1999 cohorts. Including defaults from this 90-day period should
account for the 90 days that were added by the 1998 Amendments to the
delinquency period that results in a default (i.e., from 180 days to 270
days).

If other factors affecting the timing of borrowers' defaults remained
constant, these adjusted default rates should permit year-to-year
comparisons of data from before and after the change in the definition
of default. Other factors may have also affected the timing of borrower
default: the amount of time between the date the borrower enters
repayment and the date of his or her first scheduled payment, the
borrower's payment history, the amount of time it takes for a lender to
submit a default claim, the amount of time it takes for a guaranty
agency to process a default claim, and other factors.

We calculated adjusted default rates for the 1998 and 1999 cohorts as
follows:

> Number of borrowers who enter repayment in the cohort FY and who
> default during the two-year cohort period and 90 days following the
> two-year cohort period.

Number of borrowers who enter repayment in the cohort FY.

We compare the adjusted default rates to cohort default rates in the
following graph:

![](media/image6.wmf)

Since adjusted default rates should account for the change in the
definition of default, the graph shows that, if other factors affecting
the timing of borrowers' defaults remained constant, the change in the
definition of default may have resulted in material understatements of
the 1998 and 1999 cohort default rates, compared to what they would have
been, had the definition remained unchanged: the 1998 adjusted default
rate is 10.8 percent greater than the 1998 cohort default rate, and the
1999 adjusted default rate is 16 percent greater than the 1999 cohort
default rate.

Public, private, and proprietary school types all experienced trends in
their cohort default rates and adjusted default rates similar to those
we describe for the overall default rates.

####### Third-Year Default Rates

We identified cohort borrowers who defaulted in the FY following the
two-year cohort period and used this data to calculate third-year
default rates. We calculated third-year default rates as follows:

> The number of borrowers who enter repayment in the cohort FY and who
> default in the FY following the two-year cohort period.
>
> The number of borrowers who enter repayment in the cohort FY.

The results of our calculation are presented in the following table:[^7]

![](media/image7.wmf)

A comparison of cohort default rates and third-year default rates,
identified in Table 1-1, is provided in the following graph:

![](media/image8.wmf)

Third-year default rates did not experience cohort default rates'
consistent downward trend between the 1996 and 1999 cohorts:

-   Though both the cohort and third year default rates decrease from
    1996 to the 1999, the decrease of third-year default rates (from 4.1
    to 3.5 percent) is significantly less than the decrease of cohort
    default rates (from 9.6 percent to 5.7 percent).

-   Third-year default rates *increased* from the 1997 to 1999 cohorts,
    while cohort default rates *declined* during the same period.

We also calculated third-year default rates for public, private, and
proprietary schools. The results of our calculations are presented in
the following table:

![](media/image9.wmf)

A comparison of cohort default rates and third-year default rates,
identified in Table 1-2, is provided in Graphs 1-3 and 1-4,
respectively:

![](media/image10.wmf)

![](media/image11.wmf)

A comparison of third-year default rates with cohort default rates, by
school type, shows trends similar to those identified for overall
default rates, in Graph 1-2.

####### Three-Year Default Rates

We calculated three-year default rates that included defaults that
occurred during the two-year cohort period and during the FY following
the two-year cohort period. We calculated three-year default rates as
follows:

##### The number of borrowers who enter repayment in the cohort FY and who default during the two-year cohort period and the FY following the two-year cohort period.

##### The number of borrowers who enter repayment in the cohort FY.

The results of our calculations are presented in the following table:

![](media/image12.wmf)

A comparison of cohort default rates and three-year default rates,
identified in Table 1-3, is provided in the following graph:

![](media/image13.wmf)

Though trends for three-year default rates may appear similar to trends
for cohort default rates, because both decline from 1996 to 1999, an
increasing percentage of defaulters were defaulting in the third year of
the three-year default rate: the 1996 three-year default rate is 42.6
percent greater than the 1996 cohort default rate, and the 1999
three-year default rate is 62.4 percent greater than the 1999 cohort
default rate.

The composition of each three-year default rate, as identified in Table
1-3, is illustrated in the following graph:

![](media/image14.wmf)

An analysis of the composition of the three-year default rates, in Graph
1-6, shows that the percentage of defaults in the three-year default
rate that is attributable to the two-year cohort period decreased
materially from 1996 (70.1 percent) to 1999 (61.6 percent).

We also calculated three-year default rates for public, private, and
proprietary schools. The results of our calculations are presented in
the following table:

![](media/image15.wmf)

In general, all school types included in Table 1-4 experienced the same
general trends reflected in Table 1-3, for overall default rates:
three-year default rates decrease each year, an increasing percentage of
defaulters were defaulting in the third year, and the composition of the
three year rates reflects decreased percentages of defaults attributable
to the two-year cohort period.

However, two of these trends are significantly more pronounced for
proprietary schools than for public or private schools. Proprietary
schools show the greatest

-   Increase in "Percentage that Three-Year Rate Exceeds Cohort Default
    Rate." In 1996, the three-year rate exceeded the cohort default rate
    by 43.7 percent; in 1999, the three-year rate exceeded the cohort
    default rate by 80.1 percent.

-   Decrease in the "Percentage Change 1996 to 1999" for the percentage
    of the composition of the three-year rate attributable to the cohort
    default rate. From 1996 to 1999, the proportion of defaults in the
    two-year cohort period decreased by 20.2 percent. Public and private
    schools decreased 8.5 percent and 11.2 percent, respectively.

**Recommendations:**

To provide decision makers with sufficient information on defaults in
the Title IV loan programs, we recommend that the Assistant Secretary
for Postsecondary Education and the Chief Operating Officer for Federal
Student Aid

1.  Develop and publish annually a life of cohort default rate for each
    cohort. A life of cohort default rate could be calculated using the
    same methodology employed for cohort default rates, except that with
    the passage of each FY, the rate would be recalculated using the
    cumulative number of borrowers who defaulted. The denominator for a
    given cohort would remain unchanged. A life of cohort default rate
    would serve as an additional, more comprehensive resource for the
    Department, Congress, and other decision makers, and would also help
    verify that cohort default rates calculated under the HEA contain
    sufficient information on defaults in the Title IV loan
    programs.[^8]

2.  Support an amendment to the HEA to include in the calculation of
    cohort default rates the defaults that were excluded by the 1998
    Amendments' change in the definition of default. This recommendation
    could be accomplished in a number of ways: for example, by
    supporting an amendment to return the definition of default to its
    previous 180-day delinquency basis, or by supporting an amendment to
    adjust the cohort default rate calculation to include defaults
    occurring in the 90-day period following the two-year cohort period.

> The objective of Recommendation 1.2 could be accomplished in a number
> of different ways, depending upon how the Department chooses to
> implement it. Since these amendments to the HEA could, under some
> scenarios, affect aspects of the Title IV loan programs outside cohort
> default rate issues, we encourage the Department to study and identify
> low-cost, effective options, and to support implementing amendments to
> the HEA.

**OPE Comments:**

In response to Recommendation 1.1, OPE states that FSA's Portfolio Risk
Management Group is developing, and plans to publish, a lifetime default
rate for the Title IV loan programs. This lifetime default rate will
focus on the amount of dollars in default, rather than the number of
borrowers in repayment, highlighting the borrower's ability to repay a
student loan rather than a school's administration of the program. OPE
states that

-   A life of cohort default rate for individual schools would be of
    little use to schools or the Department, because schools have a
    limited span of control over their borrowers' repayment behavior;

-   A life of cohort default rate for school types would be of little
    use because schools often change from one type to another; and

-   Publication of a second measure of default that focuses on the
    school and school type would be confusing to schools and to the
    public.

In response to Recommendation 1.2, OPE comments that adjusting the
cohort default rate calculation to include defaults occurring in the
90-day period following the two-year cohort period would delay
notifications to schools. Schools would not be informed of sanctions
before they had packaged students' aid for the next year. This delay
could be disruptive and could harm the overall goal of the Title IV
programs, which is assuring access to postsecondary education.

OIG Response:

We do not agree with OPE's contention that a life of cohort default rate
calculated for individual schools and school types would be of little
use, or that issuing such a default rate would be confusing:

-   Though a school's ability to compel students to repay their loans
    may decrease over time, the effects of a good or bad education are
    much more durable: a school's life of cohort default rate could be
    an indicator of the school's ability to successfully prepare
    students for the workforce.

-   We have no data to conclude that schools change type (i.e., from
    proprietary to private, public to private, etc.) with such frequency
    that a life of cohort default rate could not be calculated
    effectively.

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-   With proper disclosure, the publication of a life of cohort default
    rate would not be any more confusing to schools or the public than
    is the publication of statutory cohort default rates.

School and school-type life of cohort default rates could help the
Department identify schools and school types that pose an unreasonable
risk to taxpayer funds. The Department could use these rates to offer
assistance to, and formulate policy to address, the schools and school
types that pose such a risk. This type of rate could also be used to
verify that statutory cohort default rates provide sufficient
information on loan program defaults; the lifetime cohort default rate
that the Department proposes could not.

Recommendation 1.2 provides for the accomplishment of its objective in a
number of ways. OPE's comments only address one example we provide:
extending the two-year cohort period to include the following 90-day
period. There are other ways that the recommendation's objective may be
accomplished. For example, the definition of default could be returned
to its previous 180-day basis or the structure of the cohort itself
could be reconfigured. In addition, in its comment on our example, OPE
does not appear to consider the possibility of changing its processes so
that an official cohort default rate could be issued more quickly (for
example, by modifying the processes for issuing draft rates).

# Finding No. 2 -- Borrowers in Deferment and Forbearance Lower Schools' Cohort Default Rates

Borrowers may be eligible for deferment or forbearance after entering
repayment on their loans.[^9] When borrowers are granted deferments or
forbearances, they are able to postpone repayment of their loans:

-   Under 34 C.F.R. §§ 682.210(a) and 685.204(a), during a deferment, if
    a borrower's loan is eligible for interest subsidies, periodic
    principal and interest payments are deferred. If a borrower's loan
    is not eligible for interest subsidies, principal need not be paid
    during the deferment period, but interest not paid by the borrower
    is capitalized.

-   Under 34 C.F.R. §§ 682.211(a)(1) and 685.205(a), during a
    forbearance, a borrower is allowed to temporarily cease payments,
    extend the time for making payments, or temporarily make smaller
    payments than previously scheduled.

Lenders are permitted to use forbearances for eligible borrowers in
order to assist the borrowers in avoiding default on their student
loans. As noted in 34 C.F.R. § 682.211(a)(1), "The Secretary encourages
a lender to grant forbearance for the benefit of a borrower or endorser
in order to prevent the borrower or endorser from defaulting on the
borrower's or endorser's repayment obligation, or to permit the borrower
or endorser to resume honoring that obligation after default."

Under 34 C.F.R. § 668.183(b), the cohort default rate calculation's
denominator includes borrowers who are in deferment and forbearance
status, because these borrowers are considered to be in repayment on
their loans. During the deferment or forbearance period, a borrower's
lack of scheduled payments is not considered a delinquency and is not
included in the delinquency period that results in a default. According
to 34 C.F.R. § 682.210(a)(7), the delinquency period required to
establish default does not run during the deferment and post-deferment
grace periods. When these periods expire, unless the lender grants a
forbearance, the borrower resumes any delinquency status that existed
when the deferment began.

When a lender or servicer grants a deferment or forbearance on a
borrower's loan, the deferment or forbearance may help lower a school's
cohort default rate. This occurs because the default rate calculation's
denominator (the number of borrowers in the cohort) includes borrowers
who are in deferment and forbearance status. These borrowers are not
required to make payments on their loans and may not have been subject
to a risk of default during the two-year cohort period. Borrowers in
deferment and forbearance status who are not subject to a risk of
default will not be included in the default rate calculation's numerator
(the number of cohort borrowers who default). As a result, the number of
borrowers who default is divided by a number that is larger than the
total number of borrowers who are making payments on their loans and are
subject to a risk of default.

As described in this section, we determined the percentage of cohort
borrowers in deferment or forbearance on the last day of the two-year
cohort period, and we used this data to calculate alternative default
rates and alternative/adjusted default rates. Based on our analysis of
this information, cohort default rates do not appear to provide decision
makers with sufficient information on defaults in the Title IV loan
programs, because they do not consider a borrower's deferment or
forbearance status, or the borrower's risk of default during the
two-year cohort period. Without information that reflects the general
trends in defaults, schools may continue to participate in the Title IV
programs, even though a significant percentage of their students may
default. Defaulted student loans cost taxpayers money.

**[Percentage of Borrowers in Deferment or Forbearance]{.underline}**

Using Loan Record Detail Report (LRDR) files, we identified the
borrowers in each cohort who were in deferment or forbearance status on
all their loans that were included in the LRDR. We calculated the
percentage of each cohort's borrowers who were in deferment or
forbearance status as of the end of the two-year cohort period, the date
for which the cohort default rate is calculated.

The results of our calculations are provided in the following table:

![](media/image16.wmf)

The percentage of each cohort's borrowers in deferment or forbearance,
identified in Table 2-1, is illustrated in the following graph:

![](media/image17.wmf)

Between the 1996 and 1999 cohorts, the percentage of cohort borrowers in
deferment or forbearance status more than doubled, from 10.1 percent for
the 1996 cohort to 21.7 percent for the 1999 cohort. This represents a
significant increase in the percentage of cohort borrowers in deferment
or forbearance status:

-   In the 1999 cohort, approximately 1 in 5 borrowers were in deferment
    or forbearance status.

-   In the 1996 cohort, approximately 1 in 10 borrowers were in
    deferment or forbearance status.

-   GAO found that 5.2 percent, or approximately 1 in 20 borrowers, were
    in deferment or forbearance status in the 1993 cohort.[^10]

**[Alternative Default Rates]{.underline}**

In its July 1999 report, *Student Loans: Default Rates Need to be
Computed More Appropriately*, GAO found that if borrowers with loans in
deferment or forbearance status were excluded from the cohort default
rate calculation's denominator, the 1996 cohort default rate would
increase from 9.6 percent to 10.9 percent. We applied GAO's method to
calculate alternative default rates for the 1996 through 1999 cohorts.
We calculated these alternative default rates using the following
formula:

The number of borrowers who enter repayment in the cohort FY

and who default during the two-year cohort period.

> The number of borrowers who enter repayment in the cohort FY, less
> borrowers in deferment or forbearance status on the LRDR.

######## The results of our calculations are presented in the following table:

![](media/image18.wmf)

Table 2-2 shows that, if borrowers with loans in deferment or
forbearance status were excluded from the denominators of the cohort
default rate calculations, the 1996 through 1999 cohort default rates
would be materially increased. In addition, from 1996 to 1999

-   The difference between the alternative default rate and cohort
    default rate became greater: the difference increased from 11.3
    percent of the 1996 cohort default rate to 27.8 percent of the 1999
    cohort default rate.

-   The alternative default rates experienced a downward trend similar
    to that of cohort default rates, but the decline is significantly
    less than that for cohort default rates during the same period.

Public, private, and proprietary school types also experienced these
trends.

**[Alternative/Adjusted Default Rates]{.underline}**

As discussed in Finding No. 1, the change in the definition of default
may have caused the 1998 and 1999 cohort default rates to be understated
by a material amount, compared to what those cohort default rates would
have been if the definition had not changed. In order to determine the
effect that *both* the change in definition of default and borrowers in
deferment or forbearance status may have on cohort default rates, we
calculated "alternative/adjusted" default rates that

-   Exclude borrowers in deferment or forbearance status from the
    calculation's denominator and

-   Include in the numerator defaults we identified in the 90-day
    periods following the 1998 and 1999 two-year cohort periods.

    We calculated the alternative/adjusted default rates for the 1998
    and 1999 cohorts using the following formula:

> The number of borrowers who enter repayment in the cohort FY and who
> default during the two-year cohort period and during the 90 day period
> following the two-year cohort period.
>
> The number of borrowers who enter repayment in the cohort FY, less the
> number of borrowers in deferment and forbearance status on the LRDR.

The results of our calculations are provided in the following table:

![](media/image19.wmf)

A comparison of the cohort default rates and alternative/adjusted
default rates, identified in Table 2-3, is provided in the following
graph:

![](media/image20.wmf)

As Table 2-3 and Graph 2-2 show, if borrowers with loans in deferment or
forbearance status were excluded from the cohort default rate
calculation and the 1998 and 1999 cohort default rates were adjusted for
the change in the definition of default, the effect would be a material
increase in each of the overall cohort default rates for the 1996
through 1999 cohorts. In addition, from 1996 to 1999

-   The difference between the alternative/adjusted default rate and the
    cohort default rate became greater: the difference increased from
    11.3 percent of the 1996 cohort default rate to 48.2 percent of the
    1999 cohort default rate.

-   The alternative/adjusted default rates experienced a downward trend
    similar to the trend of cohort default rates, but the decline is
    materially less than the decline of cohort default rates during the
    same period.

For the 1996 through 1999 cohorts, the overall alternative/adjusted
default rates and the alternative/adjusted default rates for private and
proprietary schools declined each year. However, alternative/adjusted
default rates for public schools did not experience the same yearly
declines. A comparison of cohort default rates and alternative/adjusted
default rates for public schools, identified in Table 2-3, is provided
in the following graph:

![](media/image21.wmf)

On average, during the 1996 to 1999 cohorts, public school borrowers
comprised the majority of all cohort borrowers (56 percent) and cohort
borrowers in deferment or forbearance status (61 percent). As shown in
Graph 2-3, the alternative/adjusted default rates for public schools
remained relatively unchanged for the 1996 through 1998 cohorts.

The measured decline of 1.1 percent (9.6 percent to 8.5 percent) in
public schools' alternative/adjusted default rates for the 1996 through
1999 cohorts occurred between the 1998 and 1999 cohorts. Though public
schools' 1996 through 1999 alternative/adjusted default rates declined
by 11.6 percent, this decline is materially less than the declines
during the same period for private schools and for proprietary schools.

**Recommendations:**

To provide decision makers with sufficient information on defaults in
the Title IV loan programs, we recommend that the Assistant Secretary
for Postsecondary Education and the Chief Operating Officer for Federal
Student Aid support amendments to the HEA that

2.1 Exclude from the cohort default rate calculation borrowers who are
not subject to a risk of default during the two-year cohort period,
because their loans are in deferment or forbearance status.

2.2 Include the borrowers who are excluded from a cohort default rate
calculation by Recommendation 2.1 in a subsequent cohort, when the
deferment or forbearance ends and they are subject to a risk of default.

The objective of these recommendations could be accomplished in a number
of different ways, depending upon how the Department chooses to
implement them. Since these amendments to the HEA could, under some
scenarios, require substantial expenditures for systems' modifications,
we encourage the Department to study and identify low-cost, effective
options, and to support implementing amendments to the HEA.

OPE Comments:

OPE states that excluding from the cohort default rate calculation
borrowers whose loans are in a deferment or forbearance status could
result in more schools having "fewer than 30 loans in repayment." As a
result, more schools' cohort default rates would be based on the average
number of defaults in the three most recent cohorts, under the
alternative cohort default rate calculation provided in Section
435(m)(1)(C) of the HEA, and more schools may be eligible for certain
regulatory appeals.

OIG Response:

We acknowledge that the implementation of our recommendations could
increase the number of schools with fewer than 30 borrowers in a cohort.
However, this increase should only occur during a short transition
period. Though a borrower would be removed from a cohort based on a
deferment or forbearance status, the same borrower would be included in
a later cohort, once the deferment or forbearance status ended: the
cumulative number of borrowers in cohorts would remain unchanged. In
addition, the Department currently has cohort default rate regulations
and procedures for schools with fewer than 30 borrowers in a cohort.

**[Other Matters]{.smallcaps}**

**[Other Reasons Cohort Default Rates May Not Provide Sufficient
Information.]{.underline}**

Some other reasons why cohort default rates may not provide decision
makers with sufficient information on Title IV loan program defaults are
provided below:

-   Cohort default rates reflect defaults during the two-year cohort
    period, not the life of the loan, which can be up to 30 years
    depending on the loan type and repayment plan.

-   PLUS loans and certain Consolidation loans are guaranteed by the
    government but excluded from the cohort default rate calculation.

-   Cohort default rates are calculated based upon the number of
    borrowers in a cohort, and not upon the number of loans or the loan
    amounts.

We did not examine the significance, if any, of these factors.

[Effect of Change in Definition of Default on Reducing
Defaults]{.underline}

The 1998 Amendments' change in the definition of default (see Background
and Finding No. 1) was one of several savings measures enacted to offset
the cost associated with changing the formula for lenders' student loan
interest subsidies.[^11] The Congressional Budget Office estimated that
the definition change would reduce the outlays associated with defaulted
loans by \$880 million for the period 1998 to 2008.

The estimate of these cost savings appears to have been based on the
delay of the estimated cash flows associated with defaulted loans by 90
days (thereby reducing the present value of the estimated cash flows)
and on the implementation of default aversion activities during the
90-day period, which were expected to result in fewer defaults. However,
the data we obtained during our audit did not appear to reflect a
material reduction in the number of defaults beyond what would have been
expected.

To determine if the change in the definition of default had a material
impact on reducing defaults, we estimated expected cohort default rates
for the 1998 and 1999 cohorts using a regression analysis of the 1995
through 1997 cohort default rates. In the following table, we compare
these expected default rates with the adjusted default rates we
calculated in Finding No. 1:

  -------------- ------------------ ------------------ ------------------
  **Cohort**     **Expected Default **Adjusted Default **Expected vs.
                 Rate**             Rate**             Adjusted Default
                                                       Rate Difference**

  1998           8.0%               7.7%               0.3%

  1999           7.2%               6.6%               0.6%
  -------------- ------------------ ------------------ ------------------

The comparison in the preceding table is illustrated in the following
graph:

![](media/image22.wmf)

Since the definition change was applicable for loans for which the first
day of delinquency occurred on or after October 7, 1998, cohort default
rates for the 1998 and subsequent cohorts were impacted by the
definition change. If defaults by borrowers in the 1998 and 1999 cohorts
declined at a rate materially greater than the expected trend, the graph
of adjusted default rates should exhibit a materially steeper decline
from the 1997 to 1999 cohorts.

As the preceding table and Graph OM-1 show, 1998 and 1999 adjusted
default rates did not decline by materially greater amounts than would
be expected, based upon the trend established by the 1995 to 1997 cohort
default rates. As a result, if other factors affecting the frequency of
borrower default remained constant, the change in definition of default
from a 180-day to 270-day delinquency does not appear to have had a
material impact on reducing the number of defaults in the 1998 and 1999
cohorts beyond what would have been expected, had the cohort default
rates continued the decline experienced in the 1995 to 1997 cohorts.

In addition to the 1998 Amendments' change to the definition of default,
the decline in the 1998 and 1999 adjusted default rates could have been
the result of a number of other factors that affect the frequency of
borrower default: economic growth, lower unemployment, default
management activities (i.e., removal of schools from the loan programs,
collection efforts), or other factors.

# Objective, Scope and Methodology

The objective of our audit was to determine if cohort default rates, as
calculated under the HEA, provide sufficient information on defaults in
the Title IV loan programs. Our audit covered the 1996 through 1999
cohort periods and the following FYs, as detailed below:

+-----------------+-------------------------+-------------------------+
| **Cohort**      | **Two-Year Cohort       | ## Extended Period      |
|                 | Period**                |                         |
+-----------------+-------------------------+-------------------------+
| 1996            | 10/1/95 to 9/30/97      | 10/1/97 to 9/30/98      |
+-----------------+-------------------------+-------------------------+
| 1997            | 10/1/96 to 9/30/98      | 10/1/98 to 9/30/99      |
+-----------------+-------------------------+-------------------------+
| 1998            | 10/1/97 to 9/30/99      | 10/1/99 to 9/30/00      |
+-----------------+-------------------------+-------------------------+
| 1999            | 10/1/98 to 9/30/00      | 10/1/00 to 9/30/01      |
+-----------------+-------------------------+-------------------------+

To accomplish our objective, we held discussions with officials from the
Department's FSA Default Management (DM), FSA National Student Loan Data
System (NSLDS), the NSLDS contractor, and the Department's OPE Policy,
Planning & Innovation, to gain an understanding of how cohort default
rates are calculated and their use by ED. We reviewed laws, regulations,
and program office guidance applicable to cohort default rates. We
reviewed publications and materials on the Department's FSA organization
and Title IV loan programs. We reviewed prior OIG and GAO reports
pertinent to the audit objective. We obtained loan program data from the
Department's Office of the Under Secretary, Budget Service.

We employed the following methodology to identify defaults in the FY
following each two-year cohort period (the extended cohort period):

-   The complete LRDR populations for each of the 1996 to 1999 cohorts
    were obtained from the Department's contractor.

-   We segregated each cohort's LRDR loan population into two data sets.
    The first data set consisted of the loans for all borrowers who
    entered repayment and who defaulted during the two-year cohort
    period (LRDR usage codes \"B\" and \"E\"). The second data set
    consisted of the loans for all borrowers who entered repayment and
    who did not default during the two-year cohort period (LRDR usage
    codes \"D\" and \"E\").

-   We removed contradictory records from the data set containing the
    loans for all borrowers who entered repayment and who did not
    default during the two-year cohort period. This was accomplished
    by (1) removing any duplicate borrowers at the same school, and (2)
    removing any of the borrowers who were identified, in other records,
    as also having defaulted (LRDR loan usage code \"B\").

-   In June 2002, we obtained the entire table of FFELP default claim
    records and Direct Loan default records recorded on the NSLDS (the
    default table).

-   We compared the data set containing the loans for all borrowers who
    did not default during the two-year cohort period to the default
    table and identified borrowers whose loans had defaulted prior to or
    during the original two-year cohort period. The identified borrowers
    were omitted from further analysis.

-   We compared the remaining records in the data set containing the
    loans for all borrowers who did not default during the two-year
    cohort period to the default table and identified borrowers whose
    loans defaulted during the extended cohort period.

-   We identified the populations of FFELP and Direct Loan consolidation
    loans associated with each cohort's borrowers who did not default
    during the two-year cohort period (LRDR usage codes \"N\"). We
    compared these consolidation loan populations to the default table
    and identified borrowers with consolidation loans that had defaulted
    during the extended cohort period. ED's processing logic was then
    applied to determine if a link from the defaulted consolidation loan
    to the underlying loans was available. If a link was available, we
    considered the borrower to have defaulted during the extended cohort
    period.

At each stage, we allocated the population of borrowers in default
between those that occurred during the first 90 days of each extended
cohort period (October 1^st^ through December 29^th^) and those that
occurred after the first 90 days of the extended cohort period (December
30^th^ through September 30^th^). We summarized the extended cohort
period default records by school type, using OPE identification numbers
and school type/program length data. Based upon a regression analysis of
the 1995 through 1997 cohort default rates, we estimated expected cohort
default rates for the 1998 and 1999 cohorts.

Using the populations of borrowers who defaulted in the extended cohort
periods and the numerator and denominator counts from the cohort default
rates, we calculated default rates for

-   Defaults occurring in the three-year period, which includes the
    original two-year cohort period and the extended cohort period;

-   Defaults occurring in the extended cohort period (the third year);
    and

-   Defaults occurring in the original cohort period and an additional
    90 days.

We identified the number of borrowers in each cohort who were in
deferment or forbearance status, based on data in the LRDR. We
calculated default rates that excluded borrowers in deferment and
forbearance status from the cohort default rate calculation\'s
denominator and adjusted the calculation's numerator for the change in
definition of default by including defaults recognized in the 90-days
following the 1998 and 1999 cohort periods. We analyzed the calculated
default rates. For purposes of our analysis, we deemed percentage
deviations of 10 percent or greater to be material.

To achieve the audit objective, we relied extensively on
computer-processed data contained in the NSLDS, specifically the LRDR's
loan records for all borrowers who entered repayment and who did not
default during the two-year cohort period, FFELP insurance claims
payment table, and Direct Loan Program default rate default table. We
assessed the reliability of this data by reviewing the
PriceWaterhouseCoopers NSLDS Data Quality Assessments, dated June 1999
and December 2001; comparing file record counts; and performing logic
tests on the data. We compared record counts from the LRDR files to
counts of cohort borrowers and defaulters issued by FSA DM and concluded
that the data files provided by the Department were reasonably complete.

We performed tests of the population of defaults identified in the
extended cohort period. These tests included determining if a sufficient
number of days had elapsed between the date the loan entered repayment
and the default date, determining if the FFELP insurance claim payment
date was prior to the reinsurance claim payment date, determining if
defaulted Direct Loans had been held by the Department, and determining
if the default date for Direct Loan defaults was on or prior to the date
the loan was transferred to the Department. As noted above, we omitted
contradictory records from the population of records reviewed for
defaults in the extended cohort period. While discrepancies and
contradictory records were noted during the testing, the percentage of
records with potential conflicting data was not significant given the
volume of data evaluated. The impact of these records is minimal to the
results of our analysis. Based upon the final data reliability
assessment performed, we concluded the default data is sufficiently
reliable for use in meeting the audit objective.

We also relied upon borrowers' loan status contained in the LRDR. We did
not perform tests on the validity of borrower's loan status code
contained in the LRDR. Schools and data managers are provided
opportunities to correct erroneous loan data prior to the issuance of
the official cohort default rates. In identifying borrowers in deferment
or forbearance status, we included only borrowers who had a loan status
code of deferment or forbearance for all their loans. Our analysis was
based upon the effective loan status codes for the end of the two-year
cohort period that are contained in the LRDR. These codes were based on
information available on the NSLDS at the time the cohort default rate
was calculated. As noted above, we concluded that the LRDR files
provided by the Department were reasonably complete. Based upon our
preliminary data reliability assessment, we conclude the loan status
data contained in the LRDR is sufficiently reliable for use in meeting
the audit objective.

An assessment of management controls over the cohort default rate
calculation was not necessary to achieve the audit's objective. As a
result, we did not perform an assessment to determine if the management
controls are adequate and functioning as intended. To achieve the
objective of our audit, we gained an understanding of how cohort default
rates are calculated through discussions with FSA officials and reviews
of pertinent policies, procedures, and practices.

We conducted the audit fieldwork at FSA's offices in Washington, D.C.,
on June 5 and 6, 2002 and February 11, 2003. Additional work was
performed at OIG offices in Philadelphia, Pennsylvania, and Boston,
Massachusetts. An exit conference was held on September 17, 2003. We
conducted our audit in accordance with generally accepted government
audit standards appropriate to the scope of the audit work described
above.

###### Appendix A -- Gross Default Rates by Risk Category

The default rates provided in the table below are used by the Department
to develop loan program cost estimates, and represent projected defaults
over the life of the loan cohort. They are not the same as cohort
default rates calculated under the HEA. The Department uses risk
categories for its estimates of subsidy rates, because costs vary widely
within the loan programs, depending on the characteristics of the
borrower.

![](media/image23.wmf)

Appendix B -- Default Data

  ----------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ---------- -------------- ---------------
  **[Cohort Default                                                                                                                                                                           
  Rates.]{.underline}**                                                                                                                                                                       

                                      **1996**                                      **1997**                                      **1998**                                     **1999**       

  **School Type**         **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**   **Defaults**   **Borrowers**

  **Public**              **8.5%**    **95,973**     **1,124,086**      **8.3%**    **99,300**     **1,200,465**      **6.9%**    **85,741**     **1,245,697**      **5.6%**   **73,318**     **1,303,020**

  Less than 2 yrs         10.7%       695            6,508              10.7%       688            6,411              8.5%        542            6,390              7.1%       408            5,768

  2-3 yrs                 13.3%       35,996         270,232            12.7%       36,344         286,041            10.7%       31,849         297,220            8.9%       27,485         310,412

  4 yrs+                  7.0%        59,282         847,346            6.9%        62,268         908,013            5.7%        53,350         942,087            4.6%       45,425         986,840

                                                                                                                                                                                              

  **Private**             **7.0%**    **40,895**     **586,324**        **6.1%**    **37,660**     **613,143**        **4.7%**    **29,594**     **626,931**        **3.9%**   **25,049**     **645,873**

  Less than 2 yrs         21.4%       1,037          4,855              19.2%       898            4,672              14.4%       493            3,424              13.4%      426            3,173

  2-3 yrs                 12.4%       3,477          27,966             11.0%       3,010          27,405             8.4%        2,194          26,146             6.7%       1,460          21,902

  4 yrs+                  6.6%        36,381         553,503            5.8%        33,752         581,066            4.5%        26,907         597,361            3.7%       23,163         620,798

                                                                                                                                                                                              

  **Proprietary**         **18.2%**   **60,299**     **330,974**        **15.4%**   **51,704**     **334,796**        **11.4%**   **37,532**     **330,356**        **9.4%**   **32,390**     **345,417**

  Less than 2 yrs         22.0%       25,843         117,544            18.5%       20,895         113,131            14.2%       14,277         100,716            10.9%      10,430         95,643

  2-3 yrs                 16.7%       24,544         146,877            14.2%       21,343         149,956            10.4%       15,540         149,661            9.1%       14,459         158,836

  4 yrs+                  14.9%       9,912          66,553             13.2%       9,466          71,709             9.6%        7,715          79,979             8.2%       7,501          90,938

                                                                                                                                                                                              

  **Foreign**             **4.8%**    **155**        **3,221**          **4.3%**    **159**        **3,721**          **3.7%**    **155**        **4,202**          **2.2%**   **102**        **4,618**

  **Unclassified**        **1.6%**    **16**         **990**            **0.8%**    **9**          **1,128**          **0.6%**    **6**          **1,076**          **0.3%**   **2**          **605**

                                                                                                                                                                                              

  **Total**               **9.6%**    **197,338**    **2,045,595**      **8.8%**    **188,832**    **2,153,253**      **6.9%**    **153,028**    **2,208,262**      **5.7%**   **130,861**    **2,299,533**
  ----------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ---------- -------------- ---------------

<table style="width:100%;">
<colgroup>
<col style="width: 10%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="16"><table>
<colgroup>
<col style="width: 10%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 2%" />
<col style="width: 5%" />
<col style="width: 7%" />
<col style="width: 7%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="16"><strong><u>Adjusted Default Rates (See Finding No.
1).</u></strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>1998</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>1999</strong></td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>School Type</strong></td>
<td></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
<td></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Public</strong></td>
<td></td>
<td><strong>7.6%</strong></td>
<td><strong>95,043</strong></td>
<td><strong>1,245,697</strong></td>
<td></td>
<td><strong>6.5%</strong></td>
<td><strong>84,846</strong></td>
<td><strong>1,303,020</strong></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>Less than 2 yrs</td>
<td></td>
<td>9.5%</td>
<td>607</td>
<td>6,390</td>
<td></td>
<td>8.2%</td>
<td>471</td>
<td>5,768</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>2-3 yrs</td>
<td></td>
<td>11.9%</td>
<td>35,439</td>
<td>297,220</td>
<td></td>
<td>10.3%</td>
<td>31,949</td>
<td>310,412</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>4 yrs+</td>
<td></td>
<td>6.3%</td>
<td>58,997</td>
<td>942,087</td>
<td></td>
<td>5.3%</td>
<td>52,426</td>
<td>986,840</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Private</strong></td>
<td></td>
<td><strong>5.2%</strong></td>
<td><strong>32,671</strong></td>
<td><strong>626,931</strong></td>
<td></td>
<td><strong>4.5%</strong></td>
<td><strong>28,849</strong></td>
<td><strong>645,873</strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>Less than 2 yrs</td>
<td></td>
<td>16.6%</td>
<td>569</td>
<td>3,424</td>
<td></td>
<td>15.3%</td>
<td>485</td>
<td>3,173</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>2-3 yrs</td>
<td></td>
<td>9.0%</td>
<td>2,342</td>
<td>26,146</td>
<td></td>
<td>7.6%</td>
<td>1,654</td>
<td>21,902</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>4 yrs+</td>
<td></td>
<td>5.0%</td>
<td>29,760</td>
<td>597,361</td>
<td></td>
<td>4.3%</td>
<td>26,710</td>
<td>620,798</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Proprietary</strong></td>
<td></td>
<td><strong>12.6%</strong></td>
<td><strong>41,720</strong></td>
<td><strong>330,356</strong></td>
<td></td>
<td><strong>11.0%</strong></td>
<td><strong>38,039</strong></td>
<td><strong>345,417</strong></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>Less than 2 yrs</td>
<td></td>
<td>15.6%</td>
<td>15,667</td>
<td>100,716</td>
<td></td>
<td>12.8%</td>
<td>12,206</td>
<td>95,643</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>2-3 yrs</td>
<td></td>
<td>11.6%</td>
<td>17,354</td>
<td>149,661</td>
<td></td>
<td>10.7%</td>
<td>17,006</td>
<td>158,836</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td>4 yrs+</td>
<td></td>
<td>10.9%</td>
<td>8,699</td>
<td>79,979</td>
<td></td>
<td>9.7%</td>
<td>8,827</td>
<td>90,938</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Foreign</strong></td>
<td></td>
<td><strong>3.9%</strong></td>
<td><strong>163</strong></td>
<td><strong>4,202</strong></td>
<td></td>
<td><strong>2.4%</strong></td>
<td><strong>112</strong></td>
<td><strong>4,618</strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Unclassified</strong></td>
<td></td>
<td><strong>0.6%</strong></td>
<td><strong>6</strong></td>
<td><strong>1,076</strong></td>
<td></td>
<td><strong>0.3%</strong></td>
<td><strong>2</strong></td>
<td><strong>605</strong></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td><strong>Total</strong></td>
<td></td>
<td><strong>7.7%</strong></td>
<td><strong>169,603</strong></td>
<td><strong>2,208,262</strong></td>
<td></td>
<td><strong>6.6%</strong></td>
<td><strong>151,848</strong></td>
<td><strong>2,299,533</strong></td>
</tr>
</tbody>
</table></td>
</tr>
<tr class="even">
<td colspan="16"><strong><u>Third-Year Default Rates (See Finding No.
1).</u></strong></td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td><strong>1996</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>1997</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>1998</strong></td>
<td></td>
<td></td>
<td></td>
<td><strong>1999</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>School Type</strong></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
<td></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
<td></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
<td></td>
<td><strong>Rate</strong></td>
<td><strong>Defaults</strong></td>
<td><strong>Borrowers</strong></td>
</tr>
<tr class="odd">
<td><strong>Public</strong></td>
<td><strong>3.6%</strong></td>
<td><strong>40,367</strong></td>
<td><strong>1,124,086</strong></td>
<td></td>
<td><strong>2.7%</strong></td>
<td><strong>31,841</strong></td>
<td><strong>1,200,465</strong></td>
<td></td>
<td><strong>2.8%</strong></td>
<td><strong>35,244</strong></td>
<td><strong>1,245,697</strong></td>
<td></td>
<td><strong>3.1%</strong></td>
<td><strong>40,587</strong></td>
<td><strong>1,303,020</strong></td>
</tr>
<tr class="even">
<td>Less than 2 yrs</td>
<td>4.8%</td>
<td>314</td>
<td>6,508</td>
<td></td>
<td>4.6%</td>
<td>292</td>
<td>6,411</td>
<td></td>
<td>4.5%</td>
<td>287</td>
<td>6,390</td>
<td></td>
<td>4.8%</td>
<td>277</td>
<td>5,768</td>
</tr>
<tr class="odd">
<td>2-3 yrs</td>
<td>5.4%</td>
<td>14,572</td>
<td>270,232</td>
<td></td>
<td>4.1%</td>
<td>11,728</td>
<td>286,041</td>
<td></td>
<td>4.5%</td>
<td>13,509</td>
<td>297,220</td>
<td></td>
<td>5.0%</td>
<td>15,555</td>
<td>310,412</td>
</tr>
<tr class="even">
<td>4 yrs+</td>
<td>3.0%</td>
<td>25,481</td>
<td>847,346</td>
<td></td>
<td>2.2%</td>
<td>19,821</td>
<td>908,013</td>
<td></td>
<td>2.3%</td>
<td>21,448</td>
<td>942,087</td>
<td></td>
<td>2.5%</td>
<td>24,755</td>
<td>986,840</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Private</strong></td>
<td><strong>2.9%</strong></td>
<td><strong>17,145</strong></td>
<td><strong>586,324</strong></td>
<td></td>
<td><strong>2.0%</strong></td>
<td><strong>12,455</strong></td>
<td><strong>613,143</strong></td>
<td></td>
<td><strong>2.0%</strong></td>
<td><strong>12,495</strong></td>
<td><strong>626,931</strong></td>
<td></td>
<td><strong>2.3%</strong></td>
<td><strong>14,981</strong></td>
<td><strong>645,873</strong></td>
</tr>
<tr class="odd">
<td>Less than 2 yrs</td>
<td>8.1%</td>
<td>392</td>
<td>4,855</td>
<td></td>
<td>7.1%</td>
<td>333</td>
<td>4,672</td>
<td></td>
<td>7.3%</td>
<td>250</td>
<td>3,424</td>
<td></td>
<td>6.8%</td>
<td>217</td>
<td>3,173</td>
</tr>
<tr class="even">
<td>2-3 yrs</td>
<td>4.6%</td>
<td>1,277</td>
<td>27,966</td>
<td></td>
<td>3.3%</td>
<td>906</td>
<td>27,405</td>
<td></td>
<td>3.3%</td>
<td>859</td>
<td>26,146</td>
<td></td>
<td>4.5%</td>
<td>984</td>
<td>21,902</td>
</tr>
<tr class="odd">
<td>4 yrs+</td>
<td>2.8%</td>
<td>15,476</td>
<td>553,503</td>
<td></td>
<td>1.9%</td>
<td>11,216</td>
<td>581,066</td>
<td></td>
<td>1.9%</td>
<td>11,386</td>
<td>597,361</td>
<td></td>
<td>2.2%</td>
<td>13,780</td>
<td>620,798</td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><strong>Proprietary</strong></td>
<td><strong>8.0%</strong></td>
<td><strong>26,395</strong></td>
<td><strong>330,974</strong></td>
<td></td>
<td><strong>6.4%</strong></td>
<td><strong>21,400</strong></td>
<td><strong>334,796</strong></td>
<td></td>
<td><strong>6.8%</strong></td>
<td><strong>22,574</strong></td>
<td><strong>330,356</strong></td>
<td></td>
<td><strong>7.5%</strong></td>
<td><strong>25,945</strong></td>
<td><strong>345,417</strong></td>
</tr>
<tr class="even">
<td>Less than 2 yrs</td>
<td>9.3%</td>
<td>10,903</td>
<td>117,544</td>
<td></td>
<td>7.6%</td>
<td>8,562</td>
<td>113,131</td>
<td></td>
<td>7.9%</td>
<td>8,005</td>
<td>100,716</td>
<td></td>
<td>9.2%</td>
<td>8,774</td>
<td>95,643</td>
</tr>
<tr class="odd">
<td>2-3 yrs</td>
<td>7.2%</td>
<td>10,579</td>
<td>146,877</td>
<td></td>
<td>5.8%</td>
<td>8,755</td>
<td>149,956</td>
<td></td>
<td>6.7%</td>
<td>9,990</td>
<td>149,661</td>
<td></td>
<td>7.2%</td>
<td>11,509</td>
<td>158,836</td>
</tr>
<tr class="even">
<td>4 yrs+</td>
<td>7.4%</td>
<td>4,913</td>
<td>66,553</td>
<td></td>
<td>5.7%</td>
<td>4,083</td>
<td>71,709</td>
<td></td>
<td>5.7%</td>
<td>4,579</td>
<td>79,979</td>
<td></td>
<td>6.2%</td>
<td>5,662</td>
<td>90,938</td>
</tr>
<tr class="odd">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Foreign</strong></td>
<td><strong>2.5%</strong></td>
<td><strong>80</strong></td>
<td><strong>3,221</strong></td>
<td></td>
<td><strong>1.4%</strong></td>
<td><strong>51</strong></td>
<td><strong>3,721</strong></td>
<td></td>
<td><strong>1.2%</strong></td>
<td><strong>51</strong></td>
<td><strong>4,202</strong></td>
<td></td>
<td><strong>1.4%</strong></td>
<td><strong>65</strong></td>
<td><strong>4,618</strong></td>
</tr>
<tr class="odd">
<td><strong>Unclassified</strong></td>
<td><strong>0.6%</strong></td>
<td><strong>6</strong></td>
<td><strong>990</strong></td>
<td></td>
<td><strong>0.4%</strong></td>
<td><strong>5</strong></td>
<td><strong>1,128</strong></td>
<td></td>
<td><strong>0.1%</strong></td>
<td><strong>1</strong></td>
<td><strong>1,076</strong></td>
<td></td>
<td><strong>0.5%</strong></td>
<td><strong>3</strong></td>
<td><strong>605</strong></td>
</tr>
<tr class="even">
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td><strong>Total</strong></td>
<td><strong>4.1%</strong></td>
<td><strong>83,993</strong></td>
<td><strong>2,045,595</strong></td>
<td></td>
<td><strong>3.1%</strong></td>
<td><strong>65,752</strong></td>
<td><strong>2,153,253</strong></td>
<td></td>
<td><strong>3.2%</strong></td>
<td><strong>70,365</strong></td>
<td><strong>2,208,262</strong></td>
<td></td>
<td><strong>3.5%</strong></td>
<td><strong>81,581</strong></td>
<td><strong>2,299,533</strong></td>
</tr>
</tbody>
</table>

  -------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------
                                                                                                                                                                                            

  **[Three-Year                                                                                                                                                                             
  Default Rates (See                                                                                                                                                                        
  Finding No.                                                                                                                                                                               
  1).]{.underline}**                                                                                                                                                                        

                                   **1996**                                      **1997**                                      **1998**                                      **1999**       

  **School Type**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**

  **Public**           **12.1%**   **136,340**    **1,124,086**      **10.9%**   **131,141**    **1,200,465**      **9.7%**    **120,985**    **1,245,697**      **8.7%**    **113,905**    **1,303,020**

  Less than 2 yrs      15.5%       1,009          6,508              15.3%       980            6,411              13.0%       829            6,390              11.9%       685            5,768

  2-3 yrs              18.7%       50,568         270,232            16.8%       48,072         286,041            15.3%       45,358         297,220            13.9%       43,040         310,412

  4 yrs+               10.0%       84,763         847,346            9.0%        82,089         908,013            7.9%        74,798         942,087            7.1%        70,180         986,840

                                                                                                                                                                                            

  **Private**          **9.9%**    **58,040**     **586,324**        **8.2%**    **50,115**     **613,143**        **6.7%**    **42,089**     **626,931**        **6.2%**    **40,030**     **645,873**

  Less than 2 yrs      29.4%       1,429          4,855              26.3%       1,231          4,672              21.7%       743            3,424              20.3%       643            3,173

  2-3 yrs              17.0%       4,754          27,966             14.3%       3,916          27,405             11.7%       3,053          26,146             11.2%       2,444          21,902

  4 yrs+               9.4%        51,857         553,503            7.7%        44,968         581,066            6.4%        38,293         597,361            6.0%        36,943         620,798

                                                                                                                                                                                            

  **Proprietary**      **26.2%**   **86,694**     **330,974**        **21.8%**   **73,104**     **334,796**        **18.2%**   **60,106**     **330,356**        **16.9%**   **58,335**     **345,417**

  Less than 2 yrs      31.3%       36,746         117,544            26.0%       29,457         113,131            22.1%       22,282         100,716            20.1%       19,204         95,643

  2-3 yrs              23.9%       35,123         146,877            20.1%       30,098         149,956            17.1%       25,530         149,661            16.3%       25,968         158,836

  4 yrs+               22.3%       14,825         66,553             18.9%       13,549         71,709             15.4%       12,294         79,979             14.5%       13,163         90,938

                                                                                                                                                                                            

  **Foreign**          **7.3%**    **235**        **3,221**          **5.6%**    **210**        **3,721**          **4.9%**    **206**        **4,202**          **3.6%**    **167**        **4,618**

  **Unclassified**     **2.2%**    **22**         **990**            **1.2%**    **14**         **1,128**          **0.7%**    **7**          **1,076**          **0.8%**    **5**          **605**

                                                                                                                                                                                            

  **Total**            **13.8%**   **281,331**    **2,045,595**      **11.8%**   **254,584**    **2,153,253**      **10.1%**   **223,393**    **2,208,262**      **9.2%**    **212,442**    **2,299,533**

                                                                                                                                                                                            
  -------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------

  -------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------
  **[Alternative                                                                                                                                                                            
  Default Rates (See                                                                                                                                                                        
  Finding No.                                                                                                                                                                               
  2).]{.underline}**                                                                                                                                                                        

                                   **1996**                                      **1997**                                      **1998**                                      **1999**       

  **School Type**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**

  **Public**           **9.6%**    **95,973**     **997,973**        **9.8%**    **99,300**     **1,010,131**      **8.7%**    **85,741**     **988,868**        **7.3%**    **73,318**     **998,413**

  Less than 2 yrs      11.9%       695            5,855              12.6%       688            5,464              10.5%       542            5,139              9.2%        408            4,429

  2-3 yrs              15.2%       35,996         236,081            15.2%       36,344         238,416            13.7%       31,849         231,749            11.8%       27,485         233,231

  4 yrs+               7.8%        59,282         756,037            8.1%        62,268         766,251            7.1%        53,350         751,980            6.0%        45,425         760,753

                                                                                                                                                                                            

  **Private**          **7.7%**    **40,895**     **533,921**        **7.0%**    **37,660**     **537,371**        **5.7%**    **29,594**     **523,007**        **4.8%**    **25,049**     **522,819**

  Less than 2 yrs      24.1%       1,037          4,310              22.9%       898            3,915              17.7%       493            2,781              16.1%       426            2,654

  2-3 yrs              13.5%       3,477          25,819             12.4%       3,010          24,347             10.0%       2,194          21,886             8.3%        1,460          17,493

  4 yrs+               7.2%        36,381         503,792            6.6%        33,752         509,109            5.4%        26,907         498,340            4.6%        23,163         502,672

                                                                                                                                                                                            

  **Proprietary**      **19.8%**   **60,299**     **303,850**        **17.9%**   **51,704**     **289,632**        **13.9%**   **37,532**     **270,806**        **11.8%**   **32,390**     **275,007**

  Less than 2 yrs      24.1%       25,843         107,061            21.7%       20,895         96,226             17.6%       14,277         81,105             13.8%       10,430         75,519

  2-3 yrs              18.2%       24,544         135,017            16.4%       21,343         130,340            12.5%       15,540         123,910            11.3%       14,459         127,795

  4 yrs+               16.0%       9,912          61,772             15.0%       9,466          63,066             11.7%       7,715          65,791             10.5%       7,501          71,693

                                                                                                                                                                                            

  **Foreign**          **5.3%**    **155**        **2,943**          **4.9%**    **159**        **3,277**          **4.5%**    **155**        **3,450**          **2.8%**    **102**        **3,606**

  **Unclassified**     **1.7%**    **16**         **943**            **0.8%**    **9**          **1,106**          **0.6%**    **6**          **1,064**          **0.3%**    **2**          **591**

                                                                                                                                                                                            

  **Total**            **10.7%**   **197,338**    **1,839,630**      **10.3%**   **188,832**    **1,841,517**      **8.6%**    **153,028**    **1,787,195**      **7.3%**    **130,861**    **1,800,436**
  -------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------

  ------------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------
                                                                                                                                                                                                 

  **[Alternative/Adjusted                                                                                                                                                                        
  Default Rates (See                                                                                                                                                                             
  Finding No.                                                                                                                                                                                    
  2).]{.underline}**                                                                                                                                                                             

                                        **1996**                                      **1997**                                      **1998**                                      **1999**       

  **School Type**           **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**      **Rate**    **Defaults**   **Borrowers**

  **Public**                **9.6%**    **95,973**     **997,973**        **9.8%**    **99,300**     **1,010,131**      **9.6%**    **95,043**     **988,868**        **8.5%**    **84,846**     **998,413**

  Less than 2 yrs           11.9%       695            5,855              12.6%       688            5,464              11.8%       607            5,139              10.6%       471            4,429

  2-3 yrs                   15.2%       35,996         236,081            15.2%       36,344         238,416            15.3%       35,439         231,749            13.7%       31,949         233,231

  4 yrs+                    7.8%        59,282         756,037            8.1%        62,268         766,251            7.8%        58,997         751,980            6.9%        52,426         760,753

                                                                                                                                                                                                 

  **Private**               **7.7%**    **40,895**     **533,921**        **7.0%**    **37,660**     **537,371**        **6.2%**    **32,671**     **523,007**        **5.5%**    **28,849**     **522,819**

  Less than 2 yrs           24.1%       1,037          4,310              22.9%       898            3,915              20.5%       569            2,781              18.3%       485            2,654

  2-3 yrs                   13.5%       3,477          25,819             12.4%       3,010          24,347             10.7%       2,342          21,886             9.5%        1,654          17,493

  4 yrs+                    7.2%        36,381         503,792            6.6%        33,752         509,109            6.0%        29,760         498,340            5.3%        26,710         502,672

                                                                                                                                                                                                 

  **Proprietary**           **19.8%**   **60,299**     **303,850**        **17.9%**   **51,704**     **289,632**        **15.4%**   **41,720**     **270,806**        **13.8%**   **38,039**     **275,007**

  Less than 2 yrs           24.1%       25,843         107,061            21.7%       20,895         96,226             19.3%       15,667         81,105             16.2%       12,206         75,519

  2-3 yrs                   18.2%       24,544         135,017            16.4%       21,343         130,340            14.0%       17,354         123,910            13.3%       17,006         127,795

  4 yrs+                    16.0%       9,912          61,772             15.0%       9,466          63,066             13.2%       8,699          65,791             12.3%       8,827          71,693

                                                                                                                                                                                                 

  **Foreign**               **5.3%**    **155**        **2,943**          **4.9%**    **159**        **3,277**          **4.7%**    **163**        **3,450**          **3.1%**    **112**        **3,606**

  **Unclassified**          **1.7%**    **16**         **943**            **0.8%**    **9**          **1,106**          **0.6%**    **6**          **1,064**          **0.3%**    **2**          **591**

                                                                                                                                                                                                 

  **Total**                 **10.7%**   **197,338**    **1,839,630**      **10.3%**   **188,832**    **1,841,517**      **9.5%**    **169,603**    **1,787,195**      **8.4%**    **151,848**    **1,800,436**
  ------------------------- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- --------------- -- ----------- -------------- ---------------

**MEMORANDUM**

DATE : DEC. 16, 2003

TO : Bernard Tadley

Regional Inspector General for Audit

U.S. Department of Education

FROM : Sally L. Stroup /s/

SUBJECT: Comments on Draft Audit Report -- Audit to Determine if Cohort
Default

Rates Provide Sufficient Information on Defaults in Title IV Loan
Programs

(Control Number ED-OIG/A03-C0017)

The Office of Postsecondary Education, along with Federal Student Aid
with whom we have worked in developing this response, are pleased with
your efforts to review the calculation of cohort default rates. Your
report indicates that cohort default rates provide the information
required under the Higher Education Act (HEA) but recommends that
changes in statute would provide more meaningful information. The work
that you have done will inform our efforts related to the
reauthorization of the HEA and the development of new measures and
metrics in the FFEL and FDSL programs. However, we do have concerns with
two of your recommendations.

Currently, we notify institutions in September of their potential loss
of program eligibility associated with cohort default rates that exceed
statutory thresholds. We believe that implementing your recommendation
to extend the numerator of the calculation by 90 days will cause delays
in notifying institutions of their potential loss of program eligibility
until December. This will delay our ability to inform institutions of
any sanctions prior to their packaging of aid for students for the
subsequent academic year. This could be extremely disruptive and
adversely impact the overall goal of the HEA programs of assuring access
to postsecondary education.

Also, with regard to the inclusion of loans that were in forbearance and
deferment during the two-year cohort period, it would seem that the
exclusion of these loans could result in

Page 2 -- Bernard Tadley

more institutions being subject to the exception for institutions with
fewer than 30 loans in repayment or to the three-year average rules. We
will be examining the use of forbearances and deferments this fall so
that we are ready to make appropriate recommendations when we submit HEA
reauthorization proposals, if appropriate, early next year.

As part of its FY 2004 Annual Plan activities, FSA will develop several
new measures in which to demonstrate success of its default management
and prevention strategies. As part of this commitment, the Portfolio
Risk Management Group is developing, with subsequent plans to publish, a
lifetime default rate for the Title IV loan programs. The lifetime
default rate is another tool that will be utilized to reduce risk of
loss to the taxpayer. By monitoring default rates during the entire life
of the loan, FSA will be able to recognize trends during the repayment
cycle that will provide opportunities for identifying and reducing risk
factors, in addition to monitoring its success in keeping defaults at
low levels.

We anticipate that the rate will be based on the cohort year and provide
default activity for the life of the loan. For instance, loans with a
cohort year of 1996 will be monitored annually beginning with 1997
through the payoff of the loan. The lifetime default rate will focus on
the amount of dollars in default, rather than the number of borrowers in
repayment, highlighting the borrower's ability to repay a student loan
rather than the school's administration of the program. To develop and
publish a lifetime default rate by school would be of little utility to
schools and the Department. The school has a limited span of control
over borrowers' repayment behavior, within the two-year period as
defined in the cohort default rate. The development of a lifetime
default rate by sector will also be of little utility because schools
often change their institution type affecting the consistency of a
lifetime rate following a static cohort of borrowers. Additionally,
publication of a second measure of default that focuses on the school
and sector level would be confusing to schools and the public.

We anticipate that the Department will make decisions related to the
administration's reauthorization proposals of the HEA early next year.
At that time, we will seriously consider the recommendations for changes
to the cohort default rate calculation contained in the draft report.

Additionally, although your report contained information about the
defaults and loan portfolio balances, we recommend including the
following chart which we provided to GAO's audit entitled *Federal
Student Aid: Timely Performance Plans and Reports Would Help Guide and
Assess Achievement of Default Management Goals (GAO-03-348)*.

Page 3 -- Bernard Tadley ![](media/image24.wmf)

Although we provided this information to GAO to demonstrate that our
default prevention and management strategies were appropriate to guide
our efforts in the default management area, it provides a clearer
picture of the magnitude of the defaulted portfolio versus the total
Direct Loan and FFEL loans outstanding. In addition, we believe that it
is important to provide more recent statistics in Table 1 than the FY
1999 balances because, in the more recent years, the outstanding
defaulted portfolio is actually decreasing because collections are
outpacing the amount of the defaults. We believe that information may be
important to the reader and other policy makers as they are reviewing
this report.

Again, we appreciate the opportunity to comment on the important issues
identified in this draft report and will use this information to inform
our HEA Reauthorization proposals. If you have any questions on this
response, please feel free to contact David Bergeron at 202-502-7815.

cc: Terri Shaw, FSA

Pat Howard, OIG

[^1]: In this report, the "two-year cohort period" is the fiscal year in
    which the cohort's borrowers entered repayment on their loans and
    the following fiscal year. For example, the 1998 cohort default rate
    was calculated based on the number of borrowers who entered
    repayment on their loans in FY 1998 and who defaulted during the
    two-year cohort period (FYs 1998 and 1999).

[^2]: *Student Loans: Default Rates Need to Be Computed More
    Appropriately*, GAO/HEHS-99-135 (July 1999).

[^3]: Unless otherwise specified, all regulatory citations are to the
    July 1, 2001, volume.

[^4]: In OPE's response to the report, OPE states that, in recent years
    (i.e., FYs 2000 and 2001), the outstanding defaulted portfolio is
    decreasing because collections are outpacing the amount of defaults.
    The response includes a graph, comparing non-defaulted loans
    outstanding to defaulted loans outstanding, which OPE believes
    provides a clearer picture of the defaulted portfolio relative to
    the total loans outstanding.

[^5]: We previously reported and recommended that the actual default
    date be captured and used to calculate cohort default rates. The
    previous report, *Change in the Computation of Cohort Default Rates
    Would Make Rates More Accurate*, March 2000 (ED-OIG/A06-7006), is
    available on the internet at
    <http://www.ed.gov/about/offices/list/oig/areports2000.html>. The
    recommendations from the report have not been implemented, so we
    used the claims-paid date for all calculations in this report.

[^6]: In general, the first payment on a FFELP or Direct Loan is due
    approximately 60 days from the date the borrower enters repayment.
    The timeframe for making a first payment on a FFELP loan changed on
    July 1, 2003, from 45 days to 60 days after the borrower enters
    repayment. (34 C.F.R § 682.209(a)(3)(ii) (2003))

[^7]: For consistency, all default rates contained in this report have
    been rounded to one decimal place. In preparing cohort default
    rates, the Department truncates the cohort default rate at one
    decimal place. As a result, for some years and/or school type cohort
    default rates, minor differences may be noted between the cohort
    default rates contained in this report and those issued by the
    Department. For example, the truncated 1999 cohort default rate
    issued by the Department is 5.6%, and the rounded 1999 cohort
    default rate contained in this report is 5.7%.

[^8]: A life of cohort default rate would be different from the lifetime
    default rates calculated by the Department (see Background and
    Appendix A). Because the Department's lifetime default rates are
    based on estimates of defaults and are not calculated for individual
    schools, they are of limited value to FSA, in most cases, for use in
    its management of the loan programs.

[^9]: A borrower may be eligible for deferment if the borrower is
    continuing his or her education, enrolled in a graduate fellowship
    or rehabilitation training program, unemployed, or experiencing an
    economic hardship. Borrowers may be eligible for additional types of
    deferments if their loans meet certain conditions. A borrower may be
    eligible for forbearance if he or she is unable to make scheduled
    loan payments due to poor health; completing a medical or dental
    internship or residency; subject to loan payments that collectively
    are 20 percent or greater than his or her total monthly income;
    serving in a specified national service position; subject to certain
    conditions during a period of local or national emergency or
    military mobilization; or subject to certain other circumstances.

[^10]: U.S. General Accounting Office, *Student Loans: Default Rates
    Need to Be Computed More Appropriately*, GAO/HEHS-99-135, July 1999.
    While our count of 1996 cohort borrowers in deferment or forbearance
    status is different from GAO's count, our data supports the trends
    and issues identified by GAO. GAO found that approximately 96,000
    borrowers in the 1993 cohort and 227,000 borrowers in the 1996
    cohort were in deferment or forbearance status. We found that
    approximately 206,000 borrowers in the 1996 cohort were in deferment
    or forbearance status. The difference in counts may be the result of
    different methodology used to identify borrowers in deferment or
    forbearance status on the LRDR.

[^11]: Congressional Research Service Report for Congress, *Student
    Loans: 1998 Amendments*, 98-291 EPW, February 19, 1999.