APSCU 2012 Convention

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The ABCs of Defending (and Lowering) your Cohort
Default Rate
Stephen T. Chema, Ritzert Leyton, PC Charles P.
Elliott, CPA ,CFE, CFFPeter Leyton, Ritzert
Leyton, PCRon Parker, Horizon Recovery Services
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Overview

• Since 2009, macro-level factors have combined to
  spike CDRs, e.g.
• Steadily increasing college costs
• Sustained economic downturn raising overall
  consumer debt levels and depressing placement and
  starting income levels
• In addition, dramatic CDR increases are expected
  for some institutions due to policy changes
• new 3-year window for calculating CDRs
• Potential doubling of interest rates (pending
  congressional action)
• Gainful Employment Repayment Rate and 90/10 Rule
  cross-pressures

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DATA TRENDS FY 07-FY 09

• Comparison of FY 2009 Official Cohort Default
  Rates to Prior Two Official Calculations

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Road Map

• Legal Landscape
• Higher Education Opportunity Act amendments of
  2008
• Strategies to Avoid or Lower High CDRs
• Traditional Strategies
• Proactive Strategies
• Responding Effectively to a High CDR
• The Basics of Challenges, Adjustments and Appeals
  
• Case Studies

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Authorities

• Higher Education Act of 1965
• Section 435(m) CDR Calculation and Sanctions
• Section 428G Disbursement Rules
• Amended by Higher Education Opportunity Act of
  2008 (HEOA)
• Department of Education Regulation
• 34 CFR Part 668, Subparts M and N
• HEOA amendments effective October 1, 2011
• Cohort Default Rate Guide
• Non-binding agency guidance document issued by ED

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2008 HEOA AMENDMENTS

• Congress expanded the CDR calculation window from
  2 years to 3 years.
• Congress raised the threshold for sanctions new
  trigger is when each of the three most recent
  cohort default rates is 30 or greater (raised
  from 25).
• Phase-in for 3-year sanctions ED will sanction
  schools based solely on the published 3-year rate
  after FY 2011 official rates are published in
  September 2014 (i.e., after there have been
  three consecutive cohort years of such rates
  calculated).

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Additional HEOA Changes

• Effective 2012, Congress requires schools with a
  CDR equal to or greater than 30 to establish a
  default prevention task force.
• Requires default prevention and management plan
• Must identify factors causing the CDR to exceed
  threshold
• Must establish measurable objectives and steps to
  improve CDR and
• Must specify actions the school will take to
  improve student repayment .
• Congress increased the disbursement relief CDR
  threshold to 15
• For loans first disbursed on or after October 1,
  2011.
• Schools may deliver loans in one installment for
  loans that are made for single term.
• Schools may choose not to participate in the 30
  day delay for the first disbursement of a loan
  for first-time, first-year borrowers.

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DEFAULTED BORROWER

• For Cohort Default Rate purposes
• A FFEL that is not purchased by the Department is
  considered to be in default only if the guaranty
  agency has paid a default claim to the lender
  holding the loan. If the claim paid date (the
  date the guaranty agency reimburses the lender
  for the defaulted loan) falls within the cohort
  default period, the borrower is included in the
  denominator and numerator of the CDR
  calculation.
• A Direct Loan, or a FFEL that has been purchased
  by the Department, is considered to be in default
  after 360 days of delinquency. If the default
  occurs within the cohort default period, the
  borrower will be included in both the denominator
  and the numerator of the CDR calculation.

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2-Year Rates

• Current 2-Year Calculation
• Defined as the percentage of a schools FFEL and
  Direct Loan borrowers who enter repayment in one
  federal fiscal year who default in that federal
  fiscal year or by the end of the next federal
  fiscal year.

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Sanctions CURRENT LAW

• Sanctions for 2 year CDR (current law)
• Loss of eligibility if 2 year rate is gt 40 for a
  single fiscal year.
• Loss of eligibility if CDRs for three most recent
  fiscal years are 25.
• Exclusion from Title IV for the next 2 years
  after the fiscal year when the loss of
  eligibility takes effect.

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SANCTIONS New Law

• Sanctions for 3 year CDR
• Loss of DL eligibility if a single 3 year rate is
  gt 40 (same as current law, first sanctioned gt
  40 3 year rate 2011 )
• Loss of DL eligibility if three most recent
  fiscal years are 30, beginning September 2014
• Loss of eligibility for remainder of current
  Fiscal Year and two following years.

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3-Year CDR
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3-Year CDR

• Transition to 3-Year Calculation
• Three Year Calculation Window Starting with FY
  2009 cohort (official rates released September
  2012), a CDR is defined based on the percentage
  of a schools borrowers who default in that
  federal fiscal year or by the end of the next two
  federal fiscal years.
• Sanctions based on 3-year rates will apply
  beginning in September 2014, based on FY 2009, FY
  2010, and FY2011 CDRs.
• Two sets of draft (February) and official
  (September) CDRs will be issued annually for
  fiscal years 2009, 2010, and 2011. Beginning in
  2014, only the 3-year rates will be published.

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SIGNS OF TROUBLE AHEAD .

• Based on EDs preliminary 3-year 2009 cohort
  default rates .   the average private sector
  institution 3-year CDR is about 50 higher than
  the 2-year rate.
• For-profit college rates increased 114 on
  average when third year of repayment was
  included, compared to 78 and 90 percent at public
  and nonprofit colleges, respectively.

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HIGH CDRS ALSO IMPACT .

• Accreditation
• ACICS May 11, 2012 field guidance states that
  institutions with CDRs approaching thresholds of
  non-compliance must submit Default Improvement
  Plans to ACICS this Spring.
• State licensing
• California bars institutions ability to accept
  Cal Grants if 3-year CDR exceeds 30
• 42 private career colleges barred for 2012-13
• Plus 25 private career colleges barred in 2012-13
  for exceeding 24.6 limit set for 2011-12
• CA chose to use unofficial 3-year default rates
  based on data from FY 2008-FY 2010, although ED
  is not fully implementing 3-year rates until the
  2013-14 academic year

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ALSO CONSIDER INTERACTION WITH OTHER REGS

• New GE Repayment Rate Metric
• Loans in Deferment and Forbearance are not
  considered as loans in repayment as part of the
  calculation of the GE Repayment Rate metric.
• 90/10 Rule
• Private loans and debt

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LOOKING AHEAD

• Worst Case Scenario Some experts predict that
  3-year CDRs for some schools will not be twice
  their 2-year rate, but triple.
• For example, predictive modeling has shown some
  schools with a 7 2-year CDR rate going to a 30
  3-year rate
• Is this your school? How do you know it is not?
• Best Case Scenario With proactive planning and a
  clear strategy, schools can avoid or mitigate CDR
  problems through early identification of adverse
  CDR trends, careful oversight and management, and
  aggressive responses to high draft and/or
  official CDRs.
• Waiting is not an option. Schools need to develop
  or upgrade, and implement, a CDR strategy
  embedded into daily operations.

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AVOIDING/LOWERING A HIGH CDR

• Traditional Approaches include
• Student Financial Counseling
• Understanding loan repayment obligations
• Understanding repayment options
• Financial literacy and budgeting
• Entrance counseling financial aid office
• Maintaining and updating enrollment and borrower
  status information, including student
  references/family contacts
• Engaging at-risk borrowers throughout their
  education
• Using CDR management vendor services

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AVOIDING/LOWERINGA HIGH CDR

• The changing regulatory environment requires a
  proactive supplement to strong traditional
  default management approaches .

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THE GOAL IS TO AVOID THIS

• UNITED STATES DEPARTMENT OF EDUCATION WASHINGTON,
  D.C. 20202
• September 2010
• School X
• 123 Fourth Street
• Las Vegas, NV 0001-001
• OPE ID
  001234
• FY 2008 Cohort Default Rate 46.8
• RE FY 2008 Official Cohort Default Rate
  Notification Letter
• Dear President
• This letter officially notifies you of your
  school's Cohort Default Rate for FY 2008
  .Because your schools cohort default rate is
  greater than 40.0 your school is subject to loss
  of eligibility ..

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• AVOIDING/LOWERING A HIGH CDR
• A PROACTIVE APPROACH

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• STEP ONE
• Conduct a self assessment. Do not wait for ED.
• Schools can access raw loan data via Loan Record
  Detail Reports and other reports available
  through the National Student Loan Data System
  (NSLDS), at http//www.nslds.ed.gov/nslds
• Using data from NSLDS, calculate estimated
  default rates for FY 2010 (3 year), FY 2011 (2
  3 year), and FY 2012 (2 year).

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SELF-ASSESSMENT

• Using the NSLDS data
• Determine the total number of delinquencies for
  each cohort period.
• Project default rates for FY 2010 (3 year), FY
  2011 (2 3 year), and FY 2012 (2 year) using
  existing and projected delinquency counts.

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• STEP TWO Develop Your Strategy.
• Draft Your Plan A detailed program of action
  based on current and projected cohort rates.
• Define Your Team Involve all appropriate school
  administrative offices and outside
  professionals.
• Conduct a Risk Analysis Using prior cohort year
  statistics.
• Define your measurement and frequency methods.

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• STEP THREE Implement Your Plan During Loan
  Lifecycle
• Enrollment and In-School Period
• Grace Period
• Repayment Delinquencies

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• As part of your plan consider, among other
  things
• 1. Establishing an internal process to identify
  Red Flags for CDR management
• Uncollected receivables
• Bad references
• Other
• 2. Upgrade Your Admissions Process
• Refine process to collect and verify accuracy of
  application information
• Entrance counseling regarding over-borrowing
• Collect adequate student contact and reference
  information expand list of required references
  if necessary

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• GE Repayment Rate Metric
• Have a plan for monitoring forbearance and
  deferments as they impact CDR
• 4. Appropriate Role of Default Management Service
  Providers
• School-vendor coordination and information
  sharing is critical schools will need to be more
  involved with default prevention efforts, even if
  a 3rd party servicer is used. 
• Currently, many schools do not track statistics
  of 3rd party servicer and/or evaluate the results
  and how it affects the cohort default rate
  projections. 
• School should not delegate all default management
  functions.

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• CHALLENGES, ADJUSTMENTS and APPEALS

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CHALLENGING A HIGH CDR

• Challenges based on Draft CDR/draft LRDR
• Incorrect Data Challenge (IDC)
• All schools can file
• Alleges inaccuracies in data itself- incorrectly
  reported, included or excluded
• Must be filed via eCDR Appeals within 45 days of
  receiving draft LRDR
• Participant Rate Index Challenge (PRI)
• Only schools anticipating sanction will benefit
  but all can file
• Must demonstrate a sufficiently low borrower
  participation rate such that school should not be
  subject to sanction
• Must be filed within 45 days of receiving CDR and
  draft LRDR

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ADJUSTMENTS

• Adjustments based on official data
• Uncorrected Data Adjustment (UDA)
• All schools can file
• School filed Incorrect Data Challenge but data
  was not corrected
• Must file via eCDR Appeals within 30 days of
  receiving official CDR
• New Data Adjustment (NDA)
• All schools can file
• School believes its official LRDR contains new,
  incorrect data
• Must be filed via eCDR Appeals within 15 days of
  receiving official LRDR

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APpEALS

• Erroneous Data Appeal (ER)
• Loan Servicing Appeal (LS)
• Participation Rate Index Appeal (PRI)
• Economically Disadvantaged Appeal (EDA)

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ERRONEOUS DATA APPEAL (ER)

• Any school sanctioned or subject to provisional
  certification based solely on CDR may file, but
  school may only file if the ER, by itself or in
  combination with an uncorrected data adjustment
  or loan servicing appeal, would result in a CDR
  below the sanction threshold.
• Appeal is based on the official CDR containing
  new data or disputed data making the CDR
  inaccurate.
• Must file within 15 days of receiving the notice
  of loss of eligibility or provisional
  certification.

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Loan SErVICING APPEAL

• Any school may file.
• Alleges a schools official LRDR contains loans
  that have been improperly serviced for CDR
  purposes.
• Types of improper servicing are listed at 34 CFR
  668.193(b) or 668.212(b) as applicable.
• School must file request for loan servicing
  records within 15 days of receiving the official
  LRDR and pay necessary costs.

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Participation Rate Index Appeal

• Filed only after school receives notice of loss
  of eligibility or provisional certification as
  part of an official CDR package.
• School files appeal within 30 days of receiving
  notice of loss of eligibility or provisional
  certification.
• Based on school having a low percentage of
  borrowers such that it should not be sanctioned.

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ECONOMICALLY DISADVANTAGED APPEAL (EDA)

• Based on school having a high number of
  low-income students.
• Two Types
• Type 1 Based on low-income rate and placement
  rate (non-degree granting schools)
• Type 2 Based on low-income rate and completion
  rate (degree-granting schools)

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EDA

• Type One Non-Degree Granting Schools
• Based on low-income rate and placement rate
• To file, school must be subject to sanctions
• Within 30 days of receiving notice of loss of
  eligibility, school must submit managements
  written assertion and within 60 days of receiving
  notice of loss of eligibility, school must submit
  independent auditors opinion that
• The schools low income rate is 2/3 or more AND
• The schools placement rate is 44 percent or more
  

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EDA

• For both Type 1 and Type 2, Low-Income defined
  as
• A student eligible for at least ½ Pell
• OR
• AGI is less than defined poverty guidelines -
  http//aspe.os.dhhs.gov/poverty/poverty.htm

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Eda

• For Type 1, Placement defined as
• Student was employed on the date 1 year and 1 day
  after the Last Day of Attendance (LDA) in an
  occupation for which the school provided
  training or
• Student employed at least 13 weeks (91 days)
  between the enrolled date and 1 year and 1 day
  after the LDA in an occupation for which the
  school provided training or
• Student entered active duty in the U.S. Armed
  Forces within 1 year of LDA

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Eda

• Type Two Degree Granting Schools
• Based on low-income rate and completion rate.
• To file, school must be subject to sanctions
• Within 30 days of receiving notice of loss of
  eligibility, school must submit managements
  written assertion and within 60 days of receiving
  notice of loss of eligibility, school must submit
  independent auditors opinion that
• The schools low income rate is 2/3 or more AND
• The schools placement rate is 70 percent or more
  

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EDA

• For Type 2, the schools completion rate is 70
  percent or more full-time students who
• Completed an educational program
• Transferred to a higher-level program at another
  school
• Remained enrolled and are making SAP
• OR
• Entered active duty in the U.S. Armed Forces
  within 1 year of LDA.

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APPEALS Department Initiated

• Average Rates Appeal
• Thirty or Fewer Borrowers Appeal

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AVERAGE RATES APPEAL

• Must be filed within 30 days after receiving
  notice of loss of eligibility.
• School is not subject to sanction if the official
  CDR calculation on which the sanction is based
  was calculating using three consecutive official
  CDRs that equal or exceed the relevant threshold
  IF at least two of the official CDRs are average
  rates and would have been less than the relevant
  thresholds if they had been calculated using only
  the non-average data for that cohort fiscal year
  alone.
• Also, a school facing loss of eligibility based
  on one official cohort default rate that is
  greater than 40 is not subject to that sanction
  if the official CDR was calculated as an average
  rate.

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THIRTY or FEWER BORROWERS APPEAL

• Must be filed within 30 days after receiving
  notice of loss of eligibility.
• If a combined total of thirty or fewer borrowers
  entered repayment in the most recent three cohort
  fiscal years used to calculate a schools CDR,
  the school is not subject to sanction.
• ED will automatically make Initial Determination
  prior to release of official CDRs whether this
  appeal applies. If school disagrees with that
  determination, it may file an appeal within 30
  days of notice of loss of eligibility that
  includes schools certification that there were a
  total of thirty or fewer borrowers in the three
  most recent cohort fiscal years used to calculate
  the CDR.

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Appeal mistakes

• Some common mistakes and issues with filing
  challenges and appeals
• Timeframes
• Filing methods (eCDR versus paper)
• Other

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Judicial Review

• Last resort exhausted administrative remedies
• Temporary Restraining Order
• Four factors (1) the plaintiffs likelihood of
  success in the underlying dispute between the
  parties (2) whether the plaintiff will suffer
  irreparable injury if the injunction is not
  issued (3) the injury to the defendant if the
  injunction is issued and (4) the public
  interest.
• A strong showing of a likelihood of irreparable
  injury substantially lessens the plaintiffs need
  to demonstrate the likelihood of success on the
  merits. Maryland Undercoating Co. v. Payne, 603
  F.2d 477, 481 (4th Cir. 1977). The strong
  likelihood of success on the merits likewise
  reduces the need to meet the other requirements.
  Id.
• Lessons Learned from 1990s cases

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• CASE STUDIES

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CLOSING NOTES

• The data currently exists to help identify future
  CDR issues.
• There is still time to prepare and implement a
  strategy, but start now.
• Being proactive is the best - and we would argue
  only - approach to saving the time and resources
  necessary to resolve a serious and costly CDR
  problem.

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HELPFUL RESOURCES

• 1. Department of Education CDR Guide, available
  at http//ifap.ed.gov/DefaultManagement/CDRGuideM
  aster.html
• 2. Department of Education CDR Quick Reference
  Guide, available at http//ifap.ed.gov/drmaterial
  s/attachments/CDRGQuickRef093005FINAL.pdf
• 3. Department of Education Default Prevention
  and Management website, at http//www.ifap.ed.go
  v/DefaultManagement/DefaultManagement.html
• 4. Department of Education eCDR Appeals website,
  at https//ecdrappeals.ed.gov/
• 5. Department of Education Default Rate Data
  Center, at http//federalstudentaid.ed.gov/datac
  enter/cohort.html
• 6. National Student Loan Data System, at
  http//www.nslds.ed.gov/nslds

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Peter Leyton

• Peter has represented numerous institutions of
  higher education since the 1980s, as well as
  associations of schools and private-investment
  groups, with respect to regulatory, compliance
  and transactional matters. His work involves
  frequent interaction with the U.S. Department of
  Education, national, regional and programmatic
  accrediting agencies and state licensing
  agencies.
• He has recently served on the Association of
  Private Sector Colleges and Universities (APSCU)
  Board of Directors and also served on the
  CCA/APSCU Board from 1998 to 2000 and from 2002
  to 2004. He was a non-federal negotiator
  representing the association and its membership
  during the 1999 Department of Education
  negotiated rule-making process. Prior to the
  founding of Ritzert Leyton in 1994, Peter was a
  partner in the Washington, D.C. law firm of
  White, Verville, Fulton Saner (1980 to 1994),
  where he focused on postsecondary education. He
  also served as a senior program analyst from 1974
  to 1980 with the U.S. Government Accountability
  Office, the investigative arm of Congress.
• Peter received his law degree from Catholic
  University School of Law in 1980, a Masters
  degree in Public Administration from American
  University in 1974, and a Bachelors degree in
  Political Science from Antioch College in 1971.
  He is an active member of the District of
  Columbia and Virginia bars and has been specially
  admitted to appear before numerous state and
  federal courts around the country. Peter can be
  reached at pleyton_at_ritzert-leyton.com or
  703.934.9826.

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STEPHEN CHEMA

• Steve is a Senior Associate at Ritzert Leyton,
  PC. As a member of the Firms Postsecondary
  Education Practice Group, he advises clients on a
  wide array of matters related to compliance with
  student financial aid programs under Title IV of
  the Higher Education Act, including topics such
  as 90/10, the incentive compensation rule,
  institutional and student eligibility issues, and
  gainful employment.
• He also specializes in advising postsecondary
  institutions on compliance with privacy laws,
  including the Family Educational Rights and
  Privacy Act (FERPA), the Gramm-Leach-Bliley Act
  (GLBA), and the Federal Trade Commissions Red
  Flags rule. In addition, his work involves
  counseling institutions on issues related to
  anti-discrimination and employment law, campus
  security and consumer protection.
• Steve has appeared in matters before the U.S.
  Department of Education, Office of Hearings and
  Appeals, and in administrative matters before
  national and regional accrediting agencies as
  well as state regulatory agencies. He has also
  counseled clients in the regulatory aspects of
  ownership changes and substantive changes
  resulting from mergers and acquisitions. He
  earned a B.A. from The College of the Holy Cross
  and a J.D. from Catholic University. Steve can be
  reached at stchema_at_ritzert-leyton.com or
  703.934.9835.

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RON PARKER

• Ron Parker, a Certified Public Accountant, is
  currently a partner of Horizon Recovery Services,
  LP, a consulting company. Ron was formerly
  President of a full service default prevention
  company for over 20 years. He has been actively
  involved in working with universities, colleges,
  and the career college sector of higher education
  for over 22 years, having served as chief
  financial officer for a chain of career colleges
  before starting his business in 1993.
• As Partner of Horizon Recovery Services, the
  company provides a full range of collections and
  consulting services for colleges across America.
  His experience includes statistical tracking,
  training, cohort default rate challenges and
  procedures as it relates to managing the default
  prevention processes of the student loan program.
  Ron can be reached at ronjparker_at_hotmail.com or
  by phone at 512-569-6100.

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CHARLES ELLIOTT, CPA, CFE, CFF

• Charles Elliott graduated from LaSalle
  University in 1974 with a B.S. in Business
  Administration with a major in Accounting. He
  worked as a revenue examiner in the Pennsylvania
  Department of Revenue and as an economic crime
  investigation specialist in the Philadelphia
  District Attorneys office. He has investigated
  economic crime including employee theft,
  financial fraud, workers compensation fraud and
  municipal corruption. He has provided expert
  testimony in the United States District Court for
  the Eastern District of Pennsylvania, the
  Superior Court of the State of New Jersey, and
  the Commonwealth of PA Court of Common Pleas,
  criminal and civil divisions.
• Charles has written numerous articles and
  presents continuing education programs to CPAs,
  attorneys, and other professionals, in the areas
  of fraud, forensic accounting, and litigation
  services. Charles is a member of the AICPA,
  PICPA and ACFE. He is a member of the PICPA
  Committee on Forensic and Litigation Services and
  has served as the chairman of that committee. He
  was a member of the PACPA Journal Editorial
  Board. He was the co-chair of the PICPA Greater
  Philadelphia Chapter Committee on Cooperation
  with the Bar and served on the PICPA Philadelphia
  Chapter Executive Committee. He currently is a
  member of the PICPA Scholarship Trust. He is a
  member of the LaSalle University Advisory
  Committee on Fraud and Forensic Accounting and is
  a guest lecturer in the Masters Program in Fraud
  and Forensic Accounting.

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