Key insights
- The student loan payment pause may have unexpected consequences for higher education, especially on schools’ cohort default rate.
- With the recent cohort default rates being artificially low, it’s very possible default rates will rise because of loan payments resuming. The rate is calculated using a three-year look back, thus institutions will need to begin monitoring students in default as soon as repayment starts.
- To mitigate negative impact, schools should reach out to students who will be included in their cohort default rate and remind them of the upcoming start of the student repayment.
Need help managing your cohort default rate?
After a three-year pause, student loans will start accruing interest on September 1, 2023, with the first payments due the following month. While this pause has helped millions of students during the pandemic, it may have unintended consequences for higher education. Learn how this change could increase cohort default rates and how institutions can mitigate the effects of the loan repayment pause.
Monitor your cohort default rate
If a school’s cohort default rate is equal to or greater than 30%, it must establish a default prevention task force, according to 34 CFR 668.217. During the repayment pause, rates dropped to unprecedented levels for the most recent available year. Schools that historically had cohort rates in the teens now have rates well below 5%.
What is going to happen when the repayments begin? There are a few factors that might cause students to default when the repayment begins. One of those factors is the possibility that student’s Perkins loans that were assigned to the U.S. Department of Education will now have to make payments to a different servicer. In this case, students may inadvertently make payments to the incorrect servicer, increasing the risk of default.
In addition, the Biden administration has said it will move forward with another loan payment pause plan since the U.S. Supreme Court struck down its original initiative. Students could very well hold out to see if another plan gets approved and delay making payments until a further decision is made.
With the recent cohort default rates being artificially low, it’s very possible default rates will rise because of loan payments resuming. The rate is calculated using a three-year look back, thus institutions will need to begin monitoring students in default as soon as repayment starts.
Work with affected students
To help mitigate negative impact, schools should reach out to students who will be included in their cohort default rate and remind them of the upcoming start of the student repayment. They also should educate students on other options if they are unable to make payments on their loans.
There are deferment options, as well as other repayment options such as the income-driven repayment plan. The key to combat the rise of cohort default rates is to educate students before the repayment starts in fall 2023.
How we can help
CLA’s higher education professionals can help provide training or help create a plan to help manage your cohort default rate. Please contact us for assistance.