Can anything significant really be from the cohort default rate measurement? That’s the question Jonathan Liebman poses in his earlier article, Default Rate Primer: What and Who Do They Measure.” The answer is yes… and no. We need to know how well students are paying back their loans. But without supporting measurements, the current cohort default rate (CDR) is nearly meaningless.  

 

Justin Draeger

The current CDR will tell us what percentage of borrowers default somewhat soon after they enter repayment. As Liebman notes, the CDR may have been effective in weeding out fly-by-night schools that were using students and student loans for quick cash in earlier days. But it does very little to help effectively address student loan default today.  

 

From 1996 to 2002 the CDR decreased by 52 percent. But the 'life-of-loan' default rate decreased by just 23 percent, says consultant and former ED employee Frank Kesterman. Kesterman's research published in the Journal of Student Financial Aid reported that most students default in their second, third, and fourth years of repayment, rather than their first.

 

Meanwhile, the notion that the CDR reflects the quality of an educational institution is suspect. Almost without exception, schools serving low-income and minority students are held to the same CDR standards as campuses that serve low-risk populations. Because the CDR measures headcount, rather than dollars, the real impact of a school’s defaults on federal resources is never considered. If the formula measured dollars, some more elite schools may be running for cover!  

 

Congress is currently considering a tweak that would extend the existing CDR measurement period by one year and increase the CDR threshold for school ineligibility to 30 percent. However, there are at least a dozen additional measurements that would be useful to serious people who want to effectively examine loan default and come up with solutions to help borrowers and taxpayers avoid its devastating consequences.