Using the Payment Pause to Reinvent the Cohort Default Rate

The Cohort Default Rate (CDR) is one of very few levers the federal government has on the books to hold colleges and universities accountable for poor student outcomes. Unfortunately, while it was once an effective tool, colleges have learned to exploit a gaping loophole allowing them to unscrupulously push students experiencing economic hardship into deferment or forbearance to avoid default. This has resulted in only around 10 schools—less than 1% of all higher education institutions—being penalized each year, despite the growing number of students carrying unpayable debt.¹Now, the CDR has become virtually useless for the next several years, as students haven’t been required to make payments on their loans since early 2020—which means none will enter default.

Policymakers now have a clear opportunity to improve the CDR during this time when it will already be giving a free pass to colleges. This memo examines what the CDR is, how the COVID-related student loan payment pause will impact this accountability measure, and what policymakers can do to improve it to ensure it protects students and taxpayers from wasting money at poor-performing schools.

The Cohort Default Rate, Explained

The CDR is the only accountability metric based on student outcomes which is currently mandated in the Higher Education Act. It revokes a college or university’s eligibility to receive federal grants and loans if too many of their students default on their loans.

Here’s how it works:

1. A school fails the metric and loses access to federal financial aid if 30% of its students default on their loans for three consecutive years; or,
2. A school fails the metric and loses access to federal financial aid if 40% of its students default on their loans in a single year.²

Overall, the CDR intends to cut off higher education institutions from receiving taxpayer dollars if they exceed these thresholds, leaving close to a third or more of their former students in default. (Institutions do have the option to appeal a failing rate if they serve a high number of low-income students or very few students at the institution take out loans.) But given the fact that the collection of all federal student loans has been paused since the start of the pandemic, where do we go from here?

How the COVID Payment Pause Will Impact the CDR

It’s no secret that COVID and the pandemic-related recession had a devastating impact on the economy. College students faced serious challenges, including campuses closing and moving to online learning, rampant job loss, and the fear of getting sick. To help mitigate COVID’s negative effects, Congress paused all required payments for federally-held student loans in March 2020 as part of the economic stimulus bill known as The Coronavirus Aid, Relief, and Economic Security Act, giving borrowers the option to continue repaying if they could or to stop payments if they couldn’t. Importantly, the legislation also stopped collection on defaulted loans and froze interest accrual by setting the interest rate at 0%.³The original pause was set to last six months, but President Trump and President Biden each extended the relief several times, and payments have now been paused for over two years.

Although it was not the intended target of the payment pause, this state of play will render the CDR inoperable for at least several years, as the metric requires three years of repayment data before schools can face sanctions. That means colleges will have a free pass until at least 2027, no matter how many of their students they are leaving in unpayable debt.⁴

That’s why this is the perfect window of opportunity to improve the CDR measure, as schools will be held harmless for at least the next five years, giving colleges and universities plenty of time to adjust to and implement a new measure. If policymakers do choose to use this timeframe to improve the CDR, there are several options on the table to do so.

Reinventing the CDR

Even though the CDR is one of the only guardrails we have at the federal level to hold institutions accountable for student outcomes, it’s still an imperfect measure.⁵The CDR is meant to capture student loan defaults—the worst-case scenario for borrowers— but it doesn’t include borrowers who are making $0 payments and can’t afford to pay down their loans. The metric is also easy to game, an open secret that’s been acknowledged by the US Government Accountability Office and the US Department of Education (Department). Given these well-documented problems and the CDR’s current inoperability due to the payment pause, it’s time to explore ideas for how we can strengthen and reinvent this accountability metric.

1. Close the Deferment and Forbearance Loophole: At a minimum, policymakers should use the five-year gap in application of the CDR to close the forbearance and deferment loophole. Students holding federal loans have deferment and forbearance options that they can use to pause their student loan payments, helping them avoid default and making it more likely that they can ultimately repay their loans.⁶But there’s growing evidence that shows that some colleges and universities are pushing borrowers into one of these options not because it is in their best interest, but to keep them from defaulting on their loans during the three-year period in which the Department tracks data for the CDR calculation. Once the three years are up, the borrower is left to fend for themselves and could immediately default at no consequence to the institution. The College Affordability Act offered a solution to close this loophole: for borrowers in forbearance for more than three years, the Department would automatically treat them as if they had defaulted. This would close the loophole while still giving students a chance to find repayment solutions that allow them to avoid default.  
2. Supplement CDR with Repayment Rates: Another way to bolster the CDR during this timeframe would be to supplement it with a repayment rate. This would provide a more accurate picture of how students are faring in actually repaying their loans.⁷Repayment rates measure how many students have repaid at least one dollar of their student loan principal after a certain period of time, which provides a more nuanced picture than simply counting those who default. A school with low repayment rates won’t necessarily have high default rates, for example if they are encouraging their students to enroll in income-based repayment plans or utilize the deferment and forbearance options discussed above. Pairing these metrics together would help better identify schools that are leaving their students in tough financial positions after graduation.
3. Anticipate Schools at Risk of Failing CDR: The Department was collecting useful data on whether borrowers were able to repay their loans up until the start of the payment pause, but that data quickly became irrelevant as most borrowers stopped paying on their loans for more than two years. Researchers at the Urban Institute have explored how the federal government could use that kind of data to flag schools at risk of failing CDR for targeted scrutiny.⁸Based on where the institutions fell in the year before the pandemic, those at risk of failure could be asked to demonstrate improvement to their student outcomes.

Alternatives to the CDR

There are also several alternative metrics researchers have proposed that could help hold institutions accountable for student outcomes in a more meaningful way than the CDR (or in addition to it). Three of these metrics share a focus on earnings and price to identify schools or programs that leave their students at higher risk of loan default and head off unmanageable debt before it starts.

1. A Price-to-Earnings Premium: Third Way’s Price-to-Earnings metric looks at how much an average student would pay to obtain a degree at an institution and how much they could expect to earn compared to the average high school graduate to determine how many years it would take the student to recoup what they invested in their education. This metric can give students and taxpayers a better sense of the true return on investment: how much better off a college leaves a student than they would’ve been had they never enrolled.⁹Fortunately, around two-thirds of institutions across the country offer a sufficient wage premium to students, who on average can recoup their educational costs within five years. But nearly 450 federally-funded institutions deliver no return on investment to their students, meaning they won’t recoup their investment at all (and neither will taxpayers).
2. Debt as a Percent of Earnings: Another proposal developed by the Texas Public Policy Foundation examines a borrower’s debt as a percentage of their anticipated earnings (DPE).¹⁰ If a college program’s median debt is $25,000 and median earnings are $50,000, the DPE is 50%. This kind of metric is another way to determine whether taking out student loans for a program is worth it—or if the loans are excessive based on the student's ability to repay. If an institution has a high DPE (defined by the author as greater than 75%), it could be held accountable for that poor outcome. Under this metric, around 5% of college programs would lose eligibility to receive federal financial aid, ultimately protecting students from programs that simply aren’t worth the cost.
3. A Net Earnings Premium: Policymakers could also consider using a net earnings premium as an accountability metric­­—an idea proposed by researchers at the Brookings Institution.¹¹This metric compares the earnings of those who have attended a specific college program to the average earnings of a high school graduate to determine if the program was worth the cost. A negative net earnings premium shows that the student won’t earn more than the average high school graduate even though they’ve invested a substantial amount of time and money into higher education.¹² This metric is meant to be both easy to understand for a student in their decision-making process and difficult for institutions to game to protect students from bad actors.

Conclusion

COVID has led to more than two full years of challenges for higher education institutions, students, and borrowers. The student loan payment pause has eased some of the burdens placed on students during the pandemic, but it has also resulted in the unintended effect of rendering the CDR guardrails ineffective for at least the next five years. Policymakers should leverage this moment for a reset, to fix the current metric and consider additions to it so that accountability doesn’t lag for an extended period at the expense of protecting students and taxpayers. Policymakers should consider proposals from researchers on both sides of the aisle that incorporate debt, price, and earnings to add metrics that protect students from colleges that won’t serve them well and help ensure they get the return on investment they expect when enrolling in college.