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October 12, 2009

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Eddie Meboy

While I agree with much of your analysis I think what you are missing is that Cohort Default Rates are not meant to be a reflection of the challenges that borrowers are having in making payments. The purpose of cohort default rates are to measure the percentage of student that leave an institution in one federal fiscal year and default in the subsequent fiscal year (it is now being extended to defaulting in the second subsequent year). The idea being that if an institution has a high percentage of students immediately defaulting after leaving the institution then the school should be reviewed with an eye towards terminating it from the loan program.. Unfortunately, as you point out, the CDR has been used to make many inferences to the program that are not accurately reflected in the calculation.

The 2003 report pointed out many faults with the current calculation among them the fact that borrowers on deferments and forbearances are included in the universe of students “in repayment” status. However it does not mention the herculean task of accurately weeding these borrowers out. Right now repayment status is simple enough, after a borrower’s grace period has expired his status changes from “in grace” to “in repayment” those that enter “repayment status during the federal fiscal year (Oct 1 – Sept 30) are counted for that years cohort. As any school that has reviewed and challenged their cohort rate can tell you this simple tracking is fraught with errors. Trying to weed out those on a deferment or forbearance would only exacerbate the problems the feds already have trying to accurately report the data as it is now.

There can be no denying that student loan borrowers are having a hard time making their payments. Any long term analysis will show that, as will reports by the major lenders in the program, that is where the data is that deals with that issue. The CDR was never meant to reflect this problem and is therefore a poor tool to be used to do so.

Aaron

CDR is definitely not the whole story -- as Eddie points out above, it's pretty much limited to people who are so badly served by their schools (or so unlucky) that they default almost immediately.

A more accurate measure of overall difficulty would be percentages of borrowers currently using financial-hardship forbearances and deferments out of the entire portfolio, possibly adding delinquencies and defaults. Total percentage of loans in default is definitely another figure that guarantors watch very closely.

The problem with that measure is that portfolio composition changes from year to year. Within FFELP, for example, if a major proprietary school changes its preferred lender list and sends a lot more volume to a different guarantor, you'll see a major change in the risk profile of their portfolios over the next few years.

Even looking at student loans nationwide, it's problematic. Proprietary schools have increased their volume dramatically in the past decade, and their students default at much higher rates. How does that change the overall rate of students experiencing difficulty in repayment? It's difficult to measure, but we can safely assume it's not an improvement.

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