Can a School Lose Its Accreditation Over a 30% Cohort Default Rate? What DOE Rules Really Say—and How Schools Can Prevent It

When cosmetology schools and other vocational institutions think about compliance, financial audits, and Title IV rules usually come to mind first. However, there’s another metric that can quietly jeopardize federal funding if not monitored carefully: the Cohort Default Rate (CDR), which tracks the percentage of former students who default on their federal student loans within a specified period after entering repayment.

Understanding how the U.S. Department of Education (DOE) handles default rates—and what steps schools can take to prevent issues—is essential for protecting both eligibility for federal aid and long-term institutional health.

What Is a Cohort Default Rate?

The cohort default rate (CDR) is the percentage of a school’s federal student loan borrowers who default within a three-year period after entering repayment. DOE calculates this annually for each school participating in Title IV programs.

A high CDR signals that a significant portion of a school’s students are struggling to repay loans. For regulators, that’s a red flag about student outcomes and financial viability.

DOE Rules on Cohort Default Rates

According to DOE regulations (34 CFR § 668.206), there are two critical thresholds:

1. Greater than 40% in a single year

   • If a school’s CDR is above 40% for just one year, the school loses eligibility for the Direct Loan program.

2. 30% or higher for three consecutive years

   • If a school’s CDR is 30% or higher for three straight years, the school loses eligibility for both Direct Loans and Pell Grants.

Losing access to Pell and Direct Loans is effectively a death blow for most schools, because Title IV eligibility is central to enrollment and operations.

Accreditation vs. Federal Aid

It’s important to note: accreditation itself is not automatically revoked for a high CDR. Accreditors focus on educational quality, governance, and student outcomes. However, if federal aid is lost, many accreditors will take action, as financial stability is a key component of maintaining accreditation.

In other words, while DOE rules directly affect federal aid eligibility, accreditation bodies are watching closely. A persistently high CDR can indirectly put accreditation at risk.

Preventing High Default Rates: What Schools Can Do

Schools are not powerless. In fact, DOE requires institutions with a 30%+ CDR in a single year to submit a default prevention plan. Here are strategies schools should implement:

1. Strengthen Entrance and Exit Counseling

• Ensure students understand what federal loans are, how repayment works, and their obligations.

• Provide real-life examples with cosmetology or vocational income levels so students can make informed borrowing decisions.

2. Track Borrowers After Graduation

• Create alumni tracking systems that maintain communication after students leave.

• Partner with loan servicers to ensure students update their contact information and don’t miss important notices.

3. Offer Financial Literacy Programs

• Integrate budgeting, credit, and debt management into the curriculum.

• Help students understand the impact of default on their personal financial future.

4. Monitor Loan Volume

• Avoid encouraging students to borrow the maximum allowed if their actual cost of attendance is lower.

• Work with financial aid staff to align borrowing with realistic needs.

5. Create Career Support and Placement Programs

• Default risk can sometimes be tied directly to employability.

• Strong career services, employer partnerships, and alumni networks increase job placement rates and reduce repayment stress.

6. Develop a Proactive Default Prevention Task Force

• Assign responsibility to a cross-department team (financial aid, compliance, student services).

• Monitor DOE’s draft CDRs each year and take immediate corrective action if rates trend upward.

7. Utilize Appeals if Appropriate

If your school receives a high CDR that doesn’t reflect your student reality, DOE allows appeals:

• Data Challenges/Corrections (errors in DOE loan data)

• Participation Rate Index Appeals (small borrower populations)

• Economically Disadvantaged Appeals (special rules if most students are low-income)

Why Proactive Action Matters

A single year at 30% may not trigger aid loss, but it signals risk. Three consecutive years at or above that level will eliminate both Pell and Direct Loan access—removing the lifeblood of most cosmetology schools.

Accreditation agencies won’t immediately revoke approval because of CDR alone, but they will question an institution’s financial stability if federal aid eligibility is stripped. That’s why CDR management isn’t just about compliance—it’s about institutional survival.

Final Thoughts

A 30% cohort default rate does not, by itself, cause a school to lose accreditation. But under DOE rules, it can eliminate federal aid after three consecutive years—which almost always triggers accreditor concern.

The best defense is a strong offense: default prevention must be built into your school’s compliance strategy. With clear counseling, financial literacy support, career placement initiatives, and a proactive review of loan data, schools can keep their CDRs under control and protect both their students and their future.

👉 If you’d like help building a Default Prevention Plan tailored for cosmetology schools, including workflow templates and student communication scripts, contact me at Anderson Accounting & Tax, LLC.

Learn more about our Cosmetology Audit Prep Academy (Cap Academy) — where we prepare accredited schools for audit success.