Borrower Defense Neg Reg Day 4: Closed School and False Certification Discharge, Revisiting Standard of Evidence, Intent

By Joelle Fredman, Communications Staff

On the final day of the second rulemaking session convened to rewrite a federal borrower defense to repayment, higher education stakeholders tackled the remaining issue papers, which addressed closed school discharge, false certification discharge, guaranty agency collection fees, and subsidized usage period recalculation. Members also revisited the first few issue papers in an attempt to resolve disagreements over new language around instituting a higher standard of evidence for students to prove they were misled by their institutions, as well as to settle a debate over whether students should have to prove a school's malicious intent to qualify for loan discharge.

Building on the momentum of Wednesday's session, committee members Thursday began the morning in a discussion about closed school discharges. While members offered a handful of proposals related to amending language around location closings and a time period for students to automatically qualify for a loan discharge, nothing was overwhelmingly supported by the committee.

Some negotiators expressed concern that schools with programs that are established to last a limited amount of years may be unintentionally targeted because students who do not complete the program in the allotted time will be eligible to have their loans discharged, despite the public acknowledgement of the program's short term. A few members suggested that there be a distinction made between schools that close unexpectedly and those that close with proper warnings, to which federal negotiator Annmarie Weisman replied, "It doesn't matter... there need to be some protections for students, and closed school discharge is one of those protections."

Committee member Aaron Lacey, representing general counsels and attorneys, raised the concern that students who have their loans discharged after a closure may, in later years, transfer their earned credits to another postsecondary institution, in essence 'double-dipping' by getting the benefit of both the discharge and the transferred credits. Weisman acknowledged that although it is difficult to prevent borrowers from receiving a closed school discharge and subsequently transferring credits, which is against current rules, she believes it is unlikely because the technical nature of most credits in closed school situations shortens the timeframe in which students can transfer the credits. Lacey argued that this risk is exacerbated due to ED's intention to expand eligibility for a closed school discharge to students who withdrew not more than 150 days before the school closure, rather than the 120 days currently in regulation. Other members responded by pointing out that students may drop out of a college earlier than 120 days prior to its closure because the school may have already begun showing signs of failure, and this expansion protects these students.       

Negotiators reached more of a consensus on proposals in the issue paper on false certification discharge. Members agreed to strike language that grants false certification discharge to a student who did not have a high school diploma or otherwise meet the student eligibility academic requirements only if the school knew that the student didn't meet the requirements. Instead, a false certification discharge for a student who doesn't meet the student eligibility academic requirements will be approved unless the school provides evidence that the student presented him or herself as being eligible.

Members sped through the final two issue papers with little discussion, which propose barring guaranty agencies from collecting fees from a defaulted borrower who enters into a repayment agreement with the agency within 60 days of receiving notice of default, and propose eliminating or recalculating a borrower's subsidized usage period when a loan is discharged under the closed school, false certification, unpaid refund, or borrower defense rules.

Negotiators spent the afternoon returning to issues in the first three papers that members offered new language for throughout the week, beginning with a lengthy debate surrounding the evidentiary standard proposed for approval of a borrower defense discharge. While 2016 regulations designated that a 'preponderance of evidence' standard would be used, ED is now proposing the higher 'clear and convincing' standard.

Suzanne Martindale, representing consumer advocacy organizations, argued that raising the standard of evidence could deny students a discharge because it adds an extremely heavy burden onto the borrower. While other members agreed with Martindale that this new standard would make it nearly impossible for borrowers to prove their institutions wronged them, others applauded ED's new language on the grounds that it would stop troves of students from pursuing a borrower defense discharge just because they could.

Weisman offered the negotiators the chance to propose a redefined standard of evidence, and a number of members supported the term 'relevant evidence.' ED said it is looking forward to receiving more recommendations.

After a debate around changing the term 'newly discovered evidence' to 'new evidence,' regarding what a student or school needs in order request an appeal on a discharge ruling, members requested that ED serve as a mediator in borrower defense cases. Lacey suggested that after a borrower submits an application for discharge and the institution submits evidence supporting that it was not at fault, ED prepare a preliminary findings report to be sent to both parties. Both parties, under his suggestion, could then submit further evidence before a decision is made. While this proposal received a lot of support across the table, ED representatives argued that they may not have the time and resources to hire and train mediators.  

The final discussion of this session involved a proposal to strike new language that requires that students prove a school's intent to deceive them when applying for a loan discharge. While some school negotiators argued that intent is a necessary component, lest schools be liable for unintentional mistakes, other negotiators said that proving intent is both practically difficult and irrelevant, since the borrower has suffered harm regardless of intent. Lacey argued that many students may pursue a borrower defense discharge if ED makes it easy enough to do so, and Abby Shafroth of the National Consumer Law Center countered that based on the fact that 95 percent of claims have come from just 15 schools without an intent standard in place, this is not true. She said that ED was correct in saying, at the last rulemaking session, that an intent standard would make it very difficult for borrowers to receive loan discharges.

In addition to the negotiators' debates, the financial responsibility subcommittee took questions from the full committee regarding their proposals related to the impact of the Financial Accounting Standards Board (FASB) Accounting Standards Update, ASU 2016-14 on financial responsibility rules. This issue is more relevant to business officers than financial aid administrators and the National Association of College and University Business Officers (NACUBO) said it is going to poll its members on the issues brought up by the subcommittee.    

This discussion concluded the second session on federal borrower defense to repayment. The final four-day session, in which ED will present its revised proposed regulations to the committee, will begin February 12.


Publication Date: 1/12/2018

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