The ABC’s of Defending (and Lowering) your Cohort Default Rate

The ABC’s of Defending (and Lowering) your Cohort Default Rate

Stephen T. Chema, Ritzert & Leyton, PCCharles P. Elliott, CPA ,CFE, CFFPeter Leyton, Ritzert & Leyton, PCRon Parker, Horizon Recovery Services

OVERVIEW

Since 2009, macro-level factors have combined to spike CDRs, e.g.:

Steadily increasing college costs

Sustained economic downturn raising overall consumer debt levels and depressing placement and starting income levels

In addition, dramatic CDR increases are expected for some institutions due to policy changes:

new 3-year window for calculating CDRs

Potential doubling of interest rates (pending congressional action)

Gainful Employment Repayment Rate and 90/10 Rule cross-pressures

DATA TRENDS: FY 07-FY 09

Comparison of FY 2009 Official Cohort Default Rates to Prior Comparison of FY 2009 Official Cohort Default Rates to Prior Two Official CalculationsTwo Official Calculations

ROAD MAP

1. Legal Landscape

• Higher Education Opportunity Act amendments of 2008

2. Strategies to Avoid or Lower High CDRs

• Traditional Strategies• Proactive Strategies

3. Responding Effectively to a High CDR

• The Basics of Challenges, Adjustments and Appeals

4. Case Studies

AUTHORITIES

Higher Education Act of 1965• Section 435(m) – CDR Calculation and Sanctions• Section 428G – Disbursement Rules• Amended by Higher Education Opportunity Act of 2008 (HEOA)

Department of Education Regulation• 34 CFR Part 668, Subparts M and N• HEOA amendments effective October 1, 2011

Cohort Default Rate Guide • Non-binding agency guidance document issued by ED

2008 HEOA AMENDMENTS

• Congress expanded the CDR calculation window from 2 years to 3 years.

• Congress raised the threshold for sanctions: new trigger is when each of the three most recent cohort default rates is 30% or greater (raised from 25%).

• Phase-in for 3-year sanctions: ED will sanction schools based solely on the published 3-year rate after FY 2011 official rates are published in September 2014 (i.e., after there have been three consecutive cohort years of such rates calculated).

ADDITIONAL HEOA CHANGES

Effective 2012, Congress requires schools with a CDR equal to or greater than 30% to establish a default prevention task force.• Requires default prevention and management plan;• Must identify factors causing the CDR to exceed threshold;• Must establish measurable objectives and steps to improve CDR; and• Must specify actions the school will take to improve student repayment .

Congress increased the disbursement relief CDR threshold to 15%• For loans first disbursed on or after October 1, 2011.• Schools may deliver loans in one installment for loans that are made for

single term. • Schools may choose not to participate in the 30 day delay for the first

disbursement of a loan for first-time, first-year borrowers.

DEFAULTED BORROWER

• For Cohort Default Rate purposes:

• A FFEL that is not purchased by the Department is considered to be in default only if the guaranty agency has paid a default claim to the lender holding the loan. If the claim paid date (the date the guaranty agency reimburses the lender for the defaulted loan) falls within the cohort default period, the borrower is included in the denominator and numerator of the CDR calculation.

• A Direct Loan, or a FFEL that has been purchased by the Department, is considered to be in default after 360 days of delinquency. If the default occurs within the cohort default period, the borrower will be included in both the denominator and the numerator of the CDR calculation.

2-YEAR RATES

Current 2-Year CalculationDefined as the percentage of a school’s FFEL and Direct Loan borrowers who enter repayment in one federal fiscal year who default in that federal fiscal year or by the end of the next federal fiscal year.

SANCTIONS – CURRENT LAW

Sanctions for 2 year CDR (current law):

• Loss of eligibility if 2 year rate is > 40% for a single fiscal year.

• Loss of eligibility if CDRs for three most recent fiscal years are ≥ 25%.

• Exclusion from Title IV for the next 2 years after the fiscal year when the loss of eligibility takes effect.

SANCTIONS – NEW LAW

Sanctions for 3 year CDR:• Loss of DL eligibility if a single 3 year rate is

> 40% (same as current law, first sanctioned > 40% 3 year rate = 2011 )

• Loss of DL eligibility if three most recent fiscal years are ≥ 30%, beginning September 2014

• Loss of eligibility for remainder of current Fiscal Year and two following years.

3-YEAR CDR

3-YEAR CDR

Transition to 3-Year Calculation:

• Three Year Calculation Window: Starting with FY 2009 cohort (official rates released September 2012), a CDR is defined based on the percentage of a school’s borrowers who default in that federal fiscal year or by the end of the next two federal fiscal years.

• Sanctions based on 3-year rates will apply beginning in September 2014, based on FY 2009, FY 2010, and FY2011 CDRs.

• Two sets of draft (February) and official (September) CDRs will be issued annually for fiscal years 2009, 2010, and 2011. Beginning in 2014, only the 3-year rates will be published.

SIGNS OF TROUBLE AHEAD ….

• Based on ED’s preliminary 3-year 2009 cohort default rates …. the average private sector institution 3-year CDR is about 50% higher than the 2-year rate.

• For-profit college rates increased 114% on average when third year of repayment was included, compared to 78 and 90 percent at public and nonprofit colleges, respectively.

HIGH CDRS ALSO IMPACT ….

• Accreditation • ACICS: May 11, 2012 field guidance states that institutions with CDRs

“approaching thresholds of non-compliance” must submit Default Improvement Plans to ACICS this Spring.

• State licensing• California: bars institution’s ability to accept Cal Grants if 3-year CDR exceeds 30%

• 42 private career colleges barred for 2012-13• Plus 25 private career colleges barred in 2012-13 for exceeding 24.6 % limit

set for 2011-12• CA chose to use unofficial 3-year default rates based on data from FY 2008-FY

2010, although ED is not fully implementing 3-year rates until the 2013-14 academic year

ALSO CONSIDER …INTERACTION WITH OTHER REGS

• New GE Repayment Rate Metric

• Loans in Deferment and Forbearance are not considered as loans in “repayment” as part of the calculation of the GE Repayment Rate metric.

• 90/10 Rule

• Private loans and debt

LOOKING AHEAD …

Worst Case Scenario: Some experts predict that 3-year CDRs for some schools will not be twice their 2-year rate, but triple.

For example, predictive modeling has shown some schools with a 7% 2-year CDR rate going to a 30% 3-year rate

Is this your school? How do you know it is not?

Best Case Scenario: With proactive planning and a clear strategy, schools can avoid or mitigate CDR problems through early identification of adverse CDR trends, careful oversight and management, and aggressive responses to high draft and/or official CDRs.

Waiting is not an option. Schools need to develop or upgrade, and implement, a CDR strategy embedded into daily operations.

AVOIDING/LOWERING A HIGH CDR

Traditional Approaches include –

• Student Financial Counseling• Understanding loan repayment obligations• Understanding repayment options• Financial literacy and budgeting

• Entrance counseling – financial aid office• Maintaining and updating enrollment and borrower status information,

including student references/family contacts• Engaging at-risk borrowers throughout their education• Using CDR management vendor services

AVOIDING/LOWERINGA HIGH CDR

The changing regulatory environment requires a proactive supplement to strong traditional default management approaches ….

THE GOAL IS TO AVOID THIS …

UNITED STATES DEPARTMENT OF EDUCATION WASHINGTON, D.C. 20202

September 2010

School X 123 Fourth Street Las Vegas, NV 0001-001

OPE ID: 001234

FY 2008 Cohort Default Rate: 46.8

RE: FY 2008 Official Cohort Default Rate Notification Letter

Dear President:

This letter officially notifies you of your school's Cohort Default Rate for FY 2008 ….Because your school’s cohort default rate is greater than 40.0% your school is subject to loss of eligibility …..

AVOIDING/LOWERING A HIGH CDR: A PROACTIVE APPROACH

STEP ONE: Conduct a self assessment. Do not wait for ED. • Schools can access raw loan data via Loan Record Detail

Reports and other reports available through the National Student Loan Data System (NSLDS), at http://www.nslds.ed.gov/nslds

• Using data from NSLDS, calculate estimated default rates for FY 2010 (3 year), FY 2011 (2 & 3 year), and FY 2012 (2 year).

SELF-ASSESSMENT

Using the NSLDS data:1. Determine the total number of

delinquencies for each cohort period.

2. Project default rates for FY 2010 (3 year), FY 2011 (2 & 3 year), and FY 2012 (2 year) using existing and projected delinquency counts.

STEP TWO: Develop Your Strategy.

• Draft Your Plan: A detailed program of action based on current and projected cohort rates.

• Define Your Team: Involve all appropriate school administrative offices and outside professionals.

• Conduct a Risk Analysis: Using prior cohort year statistics.

• Define your measurement and frequency methods.

STEP THREE: Implement Your Plan During Loan Lifecycle

• Enrollment and In-School Period

• Grace Period

• Repayment & Delinquencies

As part of your plan consider, among other things:1. Establishing an internal process to identify “Red Flags” for CDR

management• Uncollected receivables • Bad references• Other

2. Upgrade Your Admissions Process • Refine process to collect and verify accuracy of application

information• Entrance counseling regarding over-borrowing• Collect adequate student contact and reference information:

expand list of required references if necessary

3. GE Repayment Rate Metric

• Have a plan for monitoring forbearance and deferments as they impact CDR

4. Appropriate Role of Default Management Service Providers

• School-vendor coordination and information sharing is critical: schools will need to be more involved with default prevention efforts, even if a 3rd party servicer is used.

• Currently, many schools do not track statistics of 3rd party servicer and/or evaluate the results and how it affects the cohort default rate projections.

• School should not delegate all default management functions.

CHALLENGES, ADJUSTMENTS and APPEALS

CHALLENGING A HIGH CDR

Challenges based on Draft CDR/draft LRDR: • Incorrect Data Challenge (IDC)

– All schools can file– Alleges inaccuracies in data itself- incorrectly reported, included or

excluded– Must be filed via eCDR Appeals within 45 days of receiving draft LRDR

• Participant Rate Index Challenge (PRI) – Only schools anticipating sanction will benefit but all can file– Must demonstrate a sufficiently low borrower participation rate such

that school should not be subject to sanction – Must be filed within 45 days of receiving CDR and draft LRDR

ADJUSTMENTS

Adjustments based on official data:

• Uncorrected Data Adjustment (UDA)- All schools can file- School filed Incorrect Data Challenge but data was not corrected- Must file via eCDR Appeals within 30 days of receiving official CDR

• New Data Adjustment (NDA)- All schools can file- School believes its official LRDR contains new, incorrect data- Must be filed via eCDR Appeals within 15 days of receiving official LRDR

APPEALS

• Erroneous Data Appeal (ER)

• Loan Servicing Appeal (LS)

• Participation Rate Index Appeal (PRI)

• Economically Disadvantaged Appeal (EDA)

ERRONEOUS DATA APPEAL (ER)

• Any school sanctioned or subject to provisional certification based solely on CDR may file, but school may only file if the ER, by itself or in combination with an uncorrected data adjustment or loan servicing appeal, would result in a CDR below the sanction threshold.

• Appeal is based on the official CDR containing “new data” or “disputed data” making the CDR inaccurate.

• Must file within 15 days of receiving the notice of loss of eligibility or provisional certification.

LOAN SERVICING APPEAL

• Any school may file.• Alleges a school’s official LRDR contains loans that have

been improperly serviced for CDR purposes.• Types of improper servicing are listed at 34 CFR

668.193(b) or 668.212(b) as applicable.• School must file request for loan servicing records within

15 days of receiving the official LRDR and pay necessary costs.

PARTICIPATION RATE INDEX APPEAL

• Filed only after school receives notice of loss of eligibility or provisional certification as part of an official CDR package.

• School files appeal within 30 days of receiving notice of loss of eligibility or provisional certification.

• Based on school having a low percentage of borrowers such that it should not be sanctioned.

ECONOMICALLY DISADVANTAGED APPEAL (EDA)

• Based on school having a high number of low-income students.

• Two Types:• Type 1 – Based on low-income rate and placement

rate (non-degree granting schools)• Type 2 – Based on low-income rate and completion

rate (degree-granting schools)

EDA

Type One: Non-Degree Granting Schools

• Based on low-income rate and placement rate • To file, school must be subject to sanctions• Within 30 days of receiving notice of loss of eligibility, school

must submit management’s written assertion and within 60 days of receiving notice of loss of eligibility, school must submit independent auditor’s opinion that:

- The school’s low income rate is 2/3 or more AND - The school’s placement rate is 44 percent or more

EDA

For both Type 1 and Type 2, Low-Income defined as:

A student eligible for at least ½ Pell

OR

AGI is less than defined poverty guidelines - http://aspe.os.dhhs.gov/poverty/poverty.htm

EDA

For Type 1, Placement defined as::

•Student was employed on the date 1 year and 1 day after the Last Day of Attendance (LDA) in an occupation for which the school provided training; or

•Student employed at least 13 weeks (91 days) between the enrolled date and 1 year and 1 day after the LDA in an occupation for which the school provided training; or

•Student entered active duty in the U.S. Armed Forces within 1 year of LDA

EDA

Type Two: Degree Granting Schools

• Based on low-income rate and completion rate.• To file, school must be subject to sanctions• Within 30 days of receiving notice of loss of eligibility, school must

submit management’s written assertion and within 60 days of receiving notice of loss of eligibility, school must submit independent auditor’s opinion that:

- The school’s low income rate is 2/3 or more AND - The school’s placement rate is 70 percent or more

EDA

For Type 2, the school’s completion rate is 70 percent or more full-time students who:

• Completed an educational program; • Transferred to a higher-level program at another school; • Remained enrolled and are making SAP;

OR• Entered active duty in the U.S. Armed Forces within 1 year of LDA.

APPEALS – DEPARTMENT INITIATED

•Average Rates Appeal

•Thirty or Fewer Borrowers Appeal

AVERAGE RATES APPEAL

• Must be filed within 30 days after receiving notice of loss of eligibility.

• School is not subject to sanction if the official CDR calculation on which the sanction is based was calculating using three consecutive official CDRs that equal or exceed the relevant threshold IF at least two of the official CDRs are average rates and would have been less than the relevant thresholds if they had been calculated using only the non-average data for that cohort fiscal year alone.

• Also, a school facing loss of eligibility based on one official cohort default rate that is greater than 40% is not subject to that sanction if the official CDR was calculated as an average rate.

THIRTY OR FEWER BORROWERS APPEAL

• Must be filed within 30 days after receiving notice of loss of eligibility.

• If a combined total of thirty or fewer borrowers entered repayment in the most recent three cohort fiscal years used to calculate a school’s CDR, the school is not subject to sanction.

• ED will automatically make Initial Determination prior to release of official CDRs whether this appeal applies. If school disagrees with that determination, it may file an appeal within 30 days of notice of loss of eligibility that includes school’s certification that there were a total of thirty or fewer borrowers in the three most recent cohort fiscal years used to calculate the CDR.

APPEAL MISTAKES

Some common mistakes and issues with filing challenges and appeals:

• Timeframes• Filing methods (eCDR versus paper)• Other

JUDICIAL REVIEW

Last resort – exhausted administrative remedies

• Temporary Restraining OrderFour factors: (1) the plaintiff‘s likelihood of success in the underlying dispute between the parties; (2) whether the plaintiff will suffer irreparable injury if the injunction is not issued; (3) the injury to the defendant if the injunction is issued; and (4) the public interest.

A strong showing of a likelihood of irreparable injury substantially lessens the plaintiffs‘ need to demonstrate the likelihood of success on the merits. Maryland Undercoating Co. v. Payne, 603 F.2d 477, 481 (4th Cir. 1977). The strong likelihood of success on the merits likewise reduces the need to meet the other requirements. Id.

• Lessons Learned from 1990’s cases

CASE STUDIES

CLOSING NOTES

• The data currently exists to help identify future CDR issues.

• There is still time to prepare and implement a strategy, but start now.

• Being proactive is the best - and we would argue only - approach to saving the time and resources necessary to resolve a serious and costly CDR problem.

HELPFUL RESOURCES

1. Department of Education CDR Guide, available at: http://ifap.ed.gov/DefaultManagement/CDRGuideMaster.html

2. Department of Education CDR Quick Reference Guide, available at: http://ifap.ed.gov/drmaterials/attachments/CDRGQuickRef093005FINAL.pdf

3. Department of Education Default Prevention and Management website, at: http://www.ifap.ed.gov/DefaultManagement/DefaultManagement.html

4. Department of Education eCDR Appeals website, at: https://ecdrappeals.ed.gov/

5. Department of Education Default Rate Data Center, at: http://federalstudentaid.ed.gov/datacenter/cohort.html

6. National Student Loan Data System, at: http://www.nslds.ed.gov/nslds

PETER LEYTON

Peter has represented numerous institutions of higher education since the 1980s, as well as associations of schools and private-investment groups, with respect to regulatory, compliance and transactional matters. His work involves frequent interaction with the U.S. Department of Education, national, regional and programmatic accrediting agencies and state licensing agencies.

He has recently served on the Association of Private Sector Colleges and Universities (APSCU) Board of Directors and also served on the CCA/APSCU Board from 1998 to 2000 and from 2002 to 2004. He was a non-federal negotiator representing the association and its membership during the 1999 Department of Education negotiated rule-making process. Prior to the founding of Ritzert & Leyton in 1994, Peter was a partner in the Washington, D.C. law firm of White, Verville, Fulton & Saner (1980 to 1994), where he focused on postsecondary education. He also served as a senior program analyst from 1974 to 1980 with the U.S. Government Accountability Office, the investigative arm of Congress.

Peter received his law degree from Catholic University School of Law in 1980, a Master’s degree in Public Administration from American University in 1974, and a Bachelor’s degree in Political Science from Antioch College in 1971. He is an active member of the District of Columbia and Virginia bars and has been specially admitted to appear before numerous state and federal courts around the country. Peter can be reached at pleyton@ritzert-leyton.com or 703.934.9826.

STEPHEN CHEMA

Steve is a Senior Associate at Ritzert & Leyton, PC. As a member of the Firm’s Postsecondary Education Practice Group, he advises clients on a wide array of matters related to compliance with student financial aid programs under Title IV of the Higher Education Act, including topics such as 90/10, the incentive compensation rule, institutional and student eligibility issues, and gainful employment.

He also specializes in advising postsecondary institutions on compliance with privacy laws, including the Family Educational Rights and Privacy Act (“FERPA”), the Gramm-Leach-Bliley Act (“GLBA”), and the Federal Trade Commission’s “Red Flags” rule. In addition, his work involves counseling institutions on issues related to anti-discrimination and employment law, campus security and consumer protection.

Steve has appeared in matters before the U.S. Department of Education, Office of Hearings and Appeals, and in administrative matters before national and regional accrediting agencies as well as state regulatory agencies. He has also counseled clients in the regulatory aspects of ownership changes and substantive changes resulting from mergers and acquisitions. He earned a B.A. from The College of the Holy Cross and a J.D. from Catholic University. Steve can be reached at stchema@ritzert-leyton.com or 703.934.9835.

RON PARKER

Ron Parker, a Certified Public Accountant, is currently a partner of Horizon Recovery Services, LP,

a consulting company. Ron was formerly President of a full service default prevention company

for over 20 years. He has been actively involved in working with universities, colleges, and the

career college sector of higher education for over 22 years, having served as chief financial

officer for a chain of career colleges before starting his business in 1993.

As Partner of Horizon Recovery Services, the company provides a full range of collections and

consulting services for colleges across America. His experience includes statistical tracking,

training, cohort default rate challenges and procedures as it relates to managing the default

prevention processes of the student loan program. Ron can be reached at

ronjparker@hotmail.com or by phone at 512-569-6100.

CHARLES ELLIOTT, CPA, CFE, CFF

Charles Elliott graduated from LaSalle University in 1974 with a B.S. in Business Administration with a major in Accounting. He worked as a revenue examiner in the Pennsylvania Department of Revenue and as an economic crime investigation specialist in the Philadelphia District Attorney’s office. He has investigated economic crime including employee theft, financial fraud, worker’s compensation fraud and municipal corruption. He has provided expert testimony in the United States District Court for the Eastern District of Pennsylvania, the Superior Court of the State of New Jersey, and the Commonwealth of PA Court of Common Pleas, criminal and civil divisions.

Charles has written numerous articles and presents continuing education programs to CPAs, attorneys, and other professionals, in the areas of fraud, forensic accounting, and litigation services. Charles is a member of the AICPA, PICPA and ACFE. He is a member of the PICPA Committee on Forensic and Litigation Services and has served as the chairman of that committee. He was a member of the PACPA Journal Editorial Board. He was the co-chair of the PICPA Greater Philadelphia Chapter Committee on Cooperation with the Bar and served on the PICPA Philadelphia Chapter Executive Committee. He currently is a member of the PICPA Scholarship Trust. He is a member of the LaSalle University Advisory Committee on Fraud and Forensic Accounting and is a guest lecturer in the Masters Program in Fraud and Forensic Accounting.