The federal student loan system is primarily focused on getting aid to students and doing so at a reasonable cost to the taxpayer. But the flipside to providing tens of billions of dollars in annual federal assistance is that there needs to be some sort of mechanism in place to ensure that subsidized loans and Pell Grants are not simply going to diploma mills or institutions that provide a low-quality education. In that regard, the most meaningful measure of federal oversight has become the cohort default rate—a hotly debated metric that is only sure to take on more importance with the release today of a new formula that potentially exposes more schools to sanctions.

Under current law, an institution’s cohort default rate is calculated by taking the number of students who entered repayment in a given fiscal year and seeing how many of them defaulted on their debt by the end of the following federal fiscal year. In other words, a student who enters repayment any time during the 2007 fiscal year (Oct. 1, 2006 to Sept. 30, 2007) is then monitored until the end of the 2008 fiscal year (Sept. 30, 2008). But there was a problem with this measure—the amount of time it takes to default is so long that pretty much the only people caught in a cohort default rate were those who never even made a payment on their loan.

Concerned that the cohort default rate was not presenting an accurate picture of student repayment experiences, legislators introduced a proposal during the reauthorization of the Higher Education Act that would extend the measurement window to three fiscal years, rather than two. To continue the earlier example, this meant that students in the 2007 cohort would be tracked until the end of the 2009 fiscal year (Sept. 30, 2009).

The proposal kicked off a firestorm of opposition from the Career College Association, a membership and lobbying group that represents for-profit institutions. The group claimed that the cohort default rate unfairly targets these schools because they enroll lots of low-income students that are more likely to default on their debt.

Ultimately, the Career College Association failed in its efforts to default the measurement window extension, but it did win an important concession in how the cohort default rate is used to sanction schools.

Cohort default rates can be a dangerous metric for schools with lots of student borrowers. Under the old formula, if a school had cohort default rates of 25 percent or greater for three consecutive cohorts then the institution can be kicked out of the federal student aid programs. The institution can suffer the same fate if its cohort default rate exceeds 40 percent in a given cohort. For most schools, a loss of access to federal aid acts effectively as a death sentence because so many students rely on federal loans and Pell Grants to pay for their education.

The concession won by the Career College Association raises the new sanction threshold to 30 percent. In posts to come, I’ll look at what this change in the threshold means for the number of schools that would be punished under the new formula and just why for-profits should be so concerned about the longer-term measurement window.