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Title: APSCU 2012 Convention


1
(No Transcript)
2
The ABCs of Defending (and Lowering) your Cohort
Default Rate
Stephen T. Chema, Ritzert Leyton, PC Charles P.
Elliott, CPA ,CFE, CFF Peter Leyton, Ritzert
Leyton, PC Ron Parker, Horizon Recovery Services
3
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

4
DATA TRENDS FY 07-FY 09
  • Comparison of FY 2009 Official Cohort Default
    Rates to Prior Two Official Calculations

5
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

6
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

7
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).

8
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.

9
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.

10
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.

11
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.

12
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.

13
3-Year CDR
14
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.

15
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.

16
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

17
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

18
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.

19
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

20
AVOIDING/LOWERING A HIGH CDR
  • The changing regulatory environment requires a
    proactive supplement to strong traditional
    default management approaches .

21
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 ..

22
  • AVOIDING/LOWERING A HIGH CDR
  • A PROACTIVE APPROACH

23
  • 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).

24
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.

25
  • 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.

26
  • STEP THREE Implement Your Plan During Loan
    Lifecycle
  • Enrollment and In-School Period
  • Grace Period
  • Repayment Delinquencies

27
  • 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

28
  • 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.

29
  • CHALLENGES, ADJUSTMENTS and APPEALS

30
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

31
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

32
APpEALS
  • Erroneous Data Appeal (ER)
  • Loan Servicing Appeal (LS)
  • Participation Rate Index Appeal (PRI)
  • Economically Disadvantaged Appeal (EDA)

33
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.

34
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.

35
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.

36
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)

37
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

38
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

39
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

40
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

41
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.

42
APPEALS Department Initiated
  • Average Rates Appeal
  • Thirty or Fewer Borrowers Appeal

43
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.

44
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.

45
Appeal mistakes
  • Some common mistakes and issues with filing
    challenges and appeals
  • Timeframes
  • Filing methods (eCDR versus paper)
  • Other

46
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

47
  • CASE STUDIES

48
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.

49
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

50
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.

51
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.

52
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.

53
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.

54
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