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Student Loan Default Rates Are Unreliable: GAO

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Families and students assessing potential colleges should tread lightly when reviewing their student loan cohort default rates. The number colleges publish, known as the cohort default rate (CDR), covering graduates during their first three years of repayment, may be misleading.

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According to a new report from the Government Accountability Office, some schools have hired consultants that encourage borrowers with past-due payments to postpone future payments by putting their loans in forbearance to avoid default. During forbearance interest continues to accrue, which ends up costing borrowers more money that if they had put the loans in deferment, where interest doesn’t accrue on federal subsidized loans, or had enrolled in an income-based repayment plan.

A typical borrower with $30,000 in loans who spent three years in forbearance would pay an additional $6,700 in interest, according to the GAO.

Colleges have a vested interest in limiting loan default rates because if their rate is 30% or higher for three consecutive years or above 40% in a single year, they risk losing the ability to participate in the Federal Direct Loan and Federal Pell Grant programs.

The GAO studied a sample of nine default management consultants that served more than 1,300 schools, which accounted for more than 1.5 million borrowers in the 2013 CDR cohort. Five of the nine consulting firms, which served about 800 schools, encouraged forbearance over other potentially more beneficial options to avoid default, and four of the five firms provided inaccurate of incomplete information to borrowers about repayment options, according to the GAO. It did not identify the consultants or the schools.

The report concludes with a number of recommendations for Congress and the Department of Education. In some cases when the DOE objected to a recommendation it was converted into one for Congress. The recommendations are as follows:

  • Congress should consider revising the cohort default rate (CDR) calculation to account for the effect of borrowers spending long periods of time in forbearance during the 3-year CDR period.
  • Congress should specify additional accountability measures to complement the CDR such as a repayment rate or replacing the CDR with a different accountability measure.
  • Congress should consider requiring that schools and default management consultants that contact borrowers about their federal student loan repayment and postponement options after they leave school present those graduates with accurate and complete information. The GAO recommended that the DOE require this, but it objected on the grounds that the Higher Education Act does not contain “explicit provisions” under which it could require schools (and their consultants) to include that information.
  • The chief operating officer of the Department of Education’s Office of Federal Student Aid should increase the transparency of the data the department publicly reports on school sanctions by adding information on the number of schools that are annually sanctioned and the frequency and success rate of appeals.
  • The DOE should seek legislation to strengthen schools’ accountability for student loan defaults. The DOE disagreed with this recommendation as well, arguing that it “has a responsibility to implement, and not draft, statutes,” so the GAO converted that recommendation into one that Congress should consider.

The DOE, according to the GAO, also criticized the GAO report for its “limited scope,” though it “inaccurately asserted” its findings were based on a small sample of interviews. The DOE also criticized the report for not taking into account enrollments in income-based repayment plans as well as forbearance.

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