Cohort Default Rates: Are They Useful?
Cohort default rates were released recently for borrowers that began repayment in 2005, and the news was good - the national rate dropped from 5.1% to 4.6%, while we at ASA posted the lowest rate of any federal student loan guarantor at 1.5%. The Dept of Education, schools, lenders and guarantors applauded each other on the concerted effort to prevent default. But not everyone took such a rosy view, arguing instead that the CDR is not an effective measurement of default prevention because it only tracks borrowers for the beginning years of repayment. Borrowers who default down the road, CDR critics argue, never get counted in the equation.
It is true that a long-term view of the entire life of the loan is essential to measuring default prevention success. But the CDR calculation does have some value in helping assess effectiveness in preventing defaults right out of the box. Whether the study period is two or three years, whether you include or exclude borrowers with deferments and forbearances is fair game for discussion, but some measure of how early-stage repairs are doing has value, as this is the most critical juncture in getting borrowers on track successfully. Statistics show that borrowers who make monthly payments on time in the first years of repayment are much less likely to default later on.
However, the cohort rate is not alone a sufficient indicator for evaluating defaults. One good idea supported by ED would be to track total lifetime defaults. Another good indicator already used to evaluate guarantor performance is the "Trigger" Reinsurance Default Rate that looks at all loans in repayment each year. The annual trigger rate reflects the percentage of loans in a guarantor's portfolio, currently in repayment, that default during that fiscal year. The lower the rate, the more successful a guarantor is at default prevention. ASA's '06 trigger rate was 0.98 percent, while the national average was 1.57 percent.
So if we think of evaluating default prevention as a puzzle, the CDR would be one of the "edge" pieces that you start with to form the border. Now it's up to those of us in the business of debt management to fill in the middle. What other pieces would you use to complete the default prevention puzzle?
Posted by Mike Ryan on October 11, 2007 at 04:17 PM EST
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Blog Author
Mike Ryan
Vice President of Borrower Services
Biography
Michael T. Ryan is Vice President of Borrower Services for American Student Assistance, a position he has held since joining ASA in February, 2003. Mr. Ryan heads ASA’s Borrower Services Division, which is responsible for all aspects of the management and delivery of service to borrowers in ASA’s education loan portfolio, including all default prevention and recovery efforts.
In his 20-plus year career in higher education financing, Mr. Ryan has held key management positions at the Massachusetts Educational Financing Authority (MEFA), and Key Education Resources (formerly Knight Tuition Payment Plans). As MEFA’s Associate Director for Programs and Operations, Mr. Ryan facilitated MEFA’s entry as a Federal Family Education Loan Program (FFELP) provider. He also played an instrumental role in the introduction of the U. Fund, (MEFA’s Section 529 College Investing Plan), managed MEFA’s U. Plan (Prepaid Tuition Program), and was responsible for the operation of MEFA’s loan programs.
While at Knight and Key, Mr. Ryan held progressively responsible management positions, from Account Manager to Senior Vice President.
Mr. Ryan is a graduate of Merrimack College.
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