Department Of Education Issues Guidance To Curb Rising Student Loan Default Rates

The department’s new best practices for default prevention include dedicated borrower portals and earnings-based counseling. The department is also working on a proposed rulemaking on tuition reduction and simplified repayment.

The U.S. Department of Education has issued new guidance urging institutions of higher education to strengthen their default management and prevention plans.

The new guidance builds on May 2025 guidance regarding Title IV compliance and highlights the link between institutional counseling and borrower success. Universities are urged to help students manage their StudentAid.gov accounts and fully understand the weight of their debt. Current nonpayment data is now being used to identify schools at risk of losing federal funding if their default rates remain high.

For example, recent borrower data reveals that over 1,800 institutions now have nonpayment rates at or exceeding 25%, a key early indicator that they may be at risk of failing federal Cohort Default Rate (CDR) measures.

Under Secretary of Education Nicholas Kent emphasized that institutions receiving taxpayer-funded federal aid must take a proactive role in ensuring students are prepared for repayment.

For financial services professionals working in the education and student lending sectors, the following key takeaways from the 2026 default reduction guidance are essential:

• Heightened Accountability for Institutions

The department reminded schools of their shared responsibility under Title IV of the Higher Education Act. Institutions risk losing eligibility for Direct Loan and Pell Grant programs if their CDR exceeds 30% for three consecutive years, or 40% in a single year. The guidance makes it clear that default management must be a priority for institutional leadership, rather than being relegated solely to financial aid offices.

• Strategic Implementation of the Repayment Assistance Plan

As the department prepares to implement reforms from the Working Families Tax Cuts Act by July 1, 2026, schools are urged to transition delinquent borrowers into the new Repayment Assistance Plan. This plan is designed to prevent increasing debt by:

• Providing reduced monthly payments.
• Waiving unpaid interest.
• Offering matching payments to reduce total loan balances.

Best Practices for Default Prevention

The department is calling for institutions to leverage technology and dedicated personnel to improve outcomes, including:

• Borrower Portals: Developing dedicated web interfaces with financial literacy tools and repayment resources.
• Specialized Staffing: Allocating personnel to provide in-person financial counseling to both current and former students.
• Data-Driven Counseling: Using program-level earnings data to enhance entrance counseling, ensuring students make informed decisions about their debt-to-income potential.

New Regulatory Flexibilities

The guidance highlights legislative changes that grant institutions new authority to set lower programmatic borrowing limits for federal student loans. Financial professionals should note that schools are being encouraged to review their financial aid packaging practices to promote more responsible borrowing at the onset of a student’s education.

Mandatory Requirements for High-Risk Schools

Institutions with a CDR of 30% or higher in a single year are now required to:

• Establish a formal default prevention task force.
• Conduct a root-cause analysis of factors driving high default rates.
• Submit a measurable default prevention plan to the Department.

The Bottom Line

This guidance signals a shift toward more aggressive institutional oversight. Financial services providers and consultants should prepare for institutions to seek enhanced financial literacy technology, data analytics for earnings tracking, and more robust outreach solutions to mitigate default risks and maintain federal funding eligibility.

Federal Student Loan Rulemaking

Meanwhile, the department has issued a Notice of Proposed Rulemaking (NPRM) on “Reimagining and Improving Student Education” (RISE) as part of the implementation of the Working Families Tax Cuts Act.

This rule marks a significant shift in federal student loan policy, focusing on tuition reduction and simplified repayment, ACA International previously reported on the department’s rulemaking announcement.

While the department focuses on institutional accountability, the changes in the proposed rulemaking could fundamentally shift the landscape of collections, servicing, and credit reporting.

The combination of the department’s guidance and the RISE rulemaking represents a move toward a “simplified but stricter” system. For servicers and financial professionals, the next 18 months will be defined by technical system updates, a massive borrower migration project, and a temporary halt on aggressive collection tools in favor of rehabilitation and the new Repayment Assistance Plan.

Comments on the proposed rules can be submitted through the Federal eRulemaking Portal at https://www.regulations.gov/commenton/ED-2025-OPE-0944-0001 and are due on or before March 2, 2026.

Commenters should include Docket ID ED-2025-OPE-0944 with their submission.

Information on using Regulations.gov, including instructions for submitting comments, is available on the site under FAQ.