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Behind the Obvious: The Quest for a Lower Cohort Default Rate

June 4, 2013

Responsible RepayWith the Department of Education’s switch to a three year calculation in cohort default rates, many schools have taken action to manage their default rate. The most obvious reason is to avoid sanctions: schools with a Cohort Default Rate (CDR) of 40% or greater for one year or a three year average of 30% or greater, stand to lose federal funding if they don’t address the problem. However, as I speak with schools, the loss of federal funding isn’t the only motivating factor in default management activities.  Other reasons exist.

Consider an incoming freshman who takes out loans to pay for his education. He may do so blindly, with the assumption that he will be able to pay off these loans once he graduates and enters the work force. However, as we know, this may not always be the case. For a number of reasons, borrowers are unable to repay their loans and find themselves with overwhelming, sometimes crushing, debt. As professionals in a position of trust, a steward of sorts, members of the financial aid community share an inherent obligation to educate student borrowers and set them on a path toward financial wellness.

Another consideration of institutions combating a bulging CDR is the loss of alumni dollars. Common sense tells us a school is not receiving donations from alumni who are saddled with unmanageable student loan debt. By this logic, even a school not being threatened by sanctions is subject to this financial loss.  Any increase in a school’s cohort default rate could mean thousands of lost alumni dollars. Regardless of your institution’s current CDR, you should have a plan in place to combat any future increase. Since the effects of a high default rate extend well beyond the financial aid office, default management activities should be part of your school’s overall strategic plan. Indeed, it is a challenge to engage all the stakeholders in default management. Luckily, if you need help developing a successful default prevention plan there are plenty of resources available, including Nelnet’s own guide.

The final step to successfully managing default is asking whether you have the resources available to act upon your plan. If you need help, you can reach out to a third party servicer for assistance. Nelnet’s own service, Responsible Repay, is a resource with two tracks: one for putting your borrower on a path of financial wellness, and a second track specifically designed to lower your CDR. At Responsible Repay, we’re experts in both areas and are happy to discuss default management and our services with you.

Jeff Recker, National Product Manager, Responsible Repay

Jeff Recker, National Product Manager, Responsible Repay

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