Student Loans

Effect of Including Certain Types of Loans in Calculating Schools' Default Rates Gao ID: HEHS-98-135R April 17, 1998

Pursuant to a congressional request, GAO provided information on the formula specified in the Higher Education Act of 1965 for calculating schools' student loan cohort default rates, focusing on the effect on schools' default rates of including loans in deferment or forbearance in the denominator of the formula.

GAO noted that: (1) students may delay repaying their loans by obtaining a deferment or forbearance on their loan after entering repayment status; (2) in the case of deferments, borrowers are not charged interest during the deferment of unsubsidized loans but are charged interest during deferment of unsubsidized loans; (3) forbearance involves temporarily ceasing payments, extending the time for making payments, or temporarily accepting smaller payments than previously scheduled; (4) since borrowers with loans in deferment or in one type of forbearance (that which permits borrowers to temporarily stop payments) do not have to make payments, these loans do not, by definition, go into default and thus are excluded from the numerator (loans in default) of the cohort default rate calculation; (5) the Department of Education, however, includes all loans in deferment or forbearance in the denominator (loans in repayment) when calculating schools' cohort default rates; (6) the greater the number of loans in deferment or forbearance in the denominator, the more a school's cohort default rate is reduced below what it would be if those loans were excluded from the denominator; (7) data on the number of Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program loans in repayment that are in deferment or forbearance were not readily available from Education; and (8) the amount of the increase in a school's cohort default rate would depend on what portion of each school's loans in repayment were in deferment or in the type of forbearance not requiring borrowers to make payments.

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