There is a great deal of interest in the higher education community about a proposal to calculate default rates on federal student loans based on a three-year, rather than the current two-year cohort of borrowers. Here are five key points for you to consider:

1. It’s Still a Proposal, Not Yet Law. The three-year cohort default rate calculation was included in legislation passed by the U.S. House of Representatives to reauthorize the Higher Education Act. But conferees for the House and Senate now must work out differences in the versions of reauthorization legislation passed by both chambers. The three-year cohort rate calculation was not included in the Senate version. The compromise bill with the new cohort rate calculation then needs to pass both houses of Congress and be signed by the president.
2. The New Calculation Won’t Take Effect for a Few Years. According to the provision passed by the House, the three-year cohort default rate would not become a standard for determining school eligibility to participate in federal student aid programs until fiscal 2012.
3. Default Rate Standards Would Also Increase. The three-year default rate calculation will mean higher default rates for virtually every postsecondary institution. The revised provision in the House bill takes that into consideration by raising the default rate standards that determine eligibility for federal student aid. For example, schools that record default rates of 30 percent or more, rather than the current standard of 25 percent or more, for three consecutive years, would be subject to sanction. The default rate standard for qualifying for the waiver from delayed and multiple disbursements also would increase to 15 percent, instead of the current 10 percent cohort default rate.
4. The Proposal Offers Earlier Appeals and Steps to Avoid Sanctions. The House proposal would permit schools with cohort default rates in excess of 30 percent for two consecutive years to appeal to the U.S. Secretary of Education claiming exceptional mitigating circumstances. In addition, after the first year of an excessive default rate, a school would be required to establish a default prevention task force to develop a plan, which would have to be submitted to the U.S. Department of Education, for improving the institution’s cohort default rate. After the second consecutive year of an excessive default rate, the school’s default prevention task force would be required to review and revise its plan.
5. Congress Supports Greater Accountability for Student Loan Defaults. It is clear from the proposal that members of Congress want a more accurate measure of student loan defaults and enhanced efforts to prevent default.

Working together, schools, lenders, student loan guarantors and the Education Department can make this new standard work by redoubling efforts to assist former students with the repayment of their loans. As an example, I invite you to review the default prevention services that USA Funds offers students and schools, by visiting www.usafunds.org/financial_aid/debt_management on the USA Funds Web site.