Removing economic barriers to postsecondary education is a primary goal of student loan programs. Despite government-guaranteed student loan programs meeting this goal, current legislation for Cohort Default Rates (CDR) threatens to reverse this progress. Under CDR, institutions are held accountable for a defined standard of loan default behavior by prior students. This institutional statistic is critical for federal funding as it affects the ability of an institution’s future students to receive Title IV funds. A range of institutions are under great CDR pressure. The basis of the threat is that the “Great Recession” is almost certain to more than double default rates. Further threatening students’ ability to access Title IV money is the recent fixing of interest rates, the increase in the cohort default period from two to three years, and the phasing out of the FFEL program. The surge in unemployment and these policy changes
disproportionately affect proprietary schools since they educate traditionally underserved populations with a higher risk of default.

This paper seeks to highlight what causes default and suggest an adjusted CDR that reflects the students served and the economic environment. Academic loan literature suggests that the default rate of an educational institution is dominated by the characteristics of the student body, and not by the public/private or profit/nonprofit nature of the school. Thus, schools tending to meet the goal of serving the disadvantaged will be inadvertently penalized — and their potential students abandoned — if standards for institutional default rates are not adjusted for both student characteristics and the national unemployment crisis.