Educational institutions can lose their federal funding if they have an excessive number of loan defaults among their graduates. An excessive rate is measured using the figure of how many of an institution’s graduates default within 3 years of graduation (called the cohort default rate). The intent is to measure whether the institutions are producing graduates who can earn a living and repay their loans.
However, educational institutions have found a way to game the metric. They are contacting their graduates and asking them to put their loans in forbearance (i.e., on ice), which means that the borrowers can avoid default. They are not paying their loans, but loans on ice do not count against the institutions’ co-hort rate. The forbearance rate has doubled since 2009. Graduates face consequences for the forbearance option. Their loans accumulate interest, their credit ratings are affected, and they cannot obtain loans for houses. The educational institutions benefit by talking graduates into forbearance, but the graduates suffer. Taxpayers foot the bill for forbearance too. The likelihood of a loan being repaid after forbearance is reduced substantially because the amount of the loan continues to grow. Graduates find themselves in a hole and the interest keeps digging them in deeper.
Legislation has been proposed to close the forbearance loophole and provide graduates with new options, including a longer 25-year repayment plan with lower monthly payments as well as government service loan forgiveness programs.