By Allie Bidwell, NASFAA Senior Reporter

The Department of Education (ED) on Wednesday published long-awaited federal regulations to govern the process by which student loan borrowers may apply for and receive debt relief in the case of institutional misrepresentation or closure. The regulations, which have yet to be published in the Federal Register, in many ways stray from the regulations finalized under the Obama administration, leaving consumer advocates pushing for stronger provisions to protect student borrowers, and others applauding an apparent move toward a balance of institutional and consumer interests.

The 436-page proposed rule comes after a negotiating committee of stakeholders from various corners of the higher education community gathered numerous times over the course of three months to discuss whether or how to develop a federal standard for borrower defense to repayment claims, under which circumstances a borrower may file a claim, and how the claim would be adjudicated, among many other key issues. ED estimates that the proposed changes would lower borrower defense payments by nearly $700 million, and closed school discharges would by nearly $100 million annually.

The regulations are not final. In fact, ED included in the Notice of Proposed Rulemaking a specific question for the public to address: whether it should only allow "defensive" claims — meaning a borrower must be in default and in collections — or to also allow "affirmative" claims that would include borrowers who are not in default on their loans. In the proposed rule, ED said it is "concerned that a process that allows for borrowers to submit affirmative claims, where there are minimal consequences for submitting an unjustified claim, could potentially create improper incentives for borrowers with unsubstantiated allegations against schools to seek loan discharges." Further in the document, ED said that if it decides to allow affirmative actions, a higher standard of evidence may be required. For now, ED is proposing maintaining the standard of evidence from the Obama-era regulations: preponderance of the evidence.

Under the proposed rule, a borrower would have to show that it is more likely than not that an institution made a misrepresentation — "a statement, act, or omission by the school to the borrower that is (i) false, misleading, or deceptive, (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (iii) directly and clearly related to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was made."

The proposed rule would also allow for partial debt relief "based on the degree of harm suffered by the borrower," but did not include a formula for calculating the amount of relief, and asked the public to comment on "methods for calculating partial relief in connection with defenses to repayment."

An overview document for the proposed rule outlined ED's thinking in its restructuring of the process to apply for debt relief.

"Postsecondary students are adults who can be reasonably expected to make informed decisions if they have access to relevant and reliable data about program outcomes," the document said. "Institutions are prohibited from misleading students by providing false or incomplete information, and remedies should be provided to a student when misrepresentation on the part of an institution causes financial harm to that student. However, students also have a responsibility when enrolling at an institution or taking student loans to be sure they have explored their options carefully and weighed the available information to make an informed choice."

Notably, the proposed rule also would not limit borrower defense claims to only for-profit institutions, would no longer allow for group discharges, and would no longer grant loan discharge to all borrowers whose schools close if the school provided "an opportunity to complete the program of study approved by the school's accrediting agency."

The proposed rule, once officially published in the Federal Register, will be open to comment from the public for 30 days.

"Our commitment and our focus has been and remains on protecting students from fraud," Education Secretary Betsy DeVos said in a statement announcing the proposed rule on Wednesday. "The regulations proposed today accomplish that by laying out clear rule of the road for higher education institutions to follow and holding institutions, rather than hardworking taxpayers, accountable for making whole those students who were harmed by an institution's deceptive practices."

DeVos announced last June that ED would halt the implementation of and rewrite both the borrower defense and gainful employment regulations. In the end, negotiators could not agree on several critical pieces of the potential regulation, and did not come to a consensus, leaving ED to write the rule on its own, taking into account negotiators' concerns and preferences from the negotiated rulemaking sessions. Negotiators from all groups took particular interest in the standard of evidence used to bring a claim, how to define misrepresentation, the possibility of having a group discharge, whether borrowers should be entitled to full or only partial relief, whether pre-dispute arbitration clauses and class action waivers should be allowed or banned, whether a borrower should have to prove the institution acted with intent in a misrepresentation, and whether there should be a statute of limitations imposed on borrowers seeking to file a defense to repayment claim.

The proposed rule makes several other significant changes to the 2016 regulations, such as removing a ban on institutions' use of pre-dispute arbitration clauses and class action waivers, removing the allowance of state law judgments to grant automatic relief, and narrowing the circumstances under which a borrower may be eligible to file a claim.

Consumer advocates and other groups representing student loan borrowers were quick to denounce the proposed rule, saying it places a higher burden on students and leaves them vulnerable to potential waste, fraud, and abuse on the part of institutions.

Ashley Harrington, a policy counsel with the Center for Responsible Lending, served as a member of the negotiated rulemaking committee and said in a statement that the proposed rule "reads more like a roadmap for institutions seeking to abuse students and avoid accountability and transparency rather than a plan to protect students and taxpayers."

"Under this rule, [ED]  goes further than any proposal discussed at negotiated rulemaking, proposing that relief be limited to borrowers in default in addition to very limited access to relief," she said. "A better solution to this growing financial burden would be preventing as many defaults as possible and holding institutions to a higher standard. Millions of consumers and billions of taxpayer dollars are at stake. Early and effective intervention would spare borrowers the multiple ramifications of loan default, particularly to their credit scores and resulting higher costs for future credit."

Sen. Patty Murray (D-WA), ranking member on the Senate Health, Education, Labor, and Pensions (HELP) Committee, said in a statement that the proposed rule would "cut billions in debt relief to students who were simply trying to better themselves and instead were cheated out of their education and savings."

"For more than a year, as Secretary DeVos continued to delay and chip away at the protections guaranteed to cheated and defrauded students, desperate student loan borrowers pleaded with Secretary DeVos to help them with unmanageable debt, and at every turn she ignored them and instead prioritized the bottom lines of corporations," Murray said. "This is a clear sign that students cannot rely on Secretary DeVos, and that she will continue to give predatory for-profit colleges and corporations a free pass when they mislead, cheat, and defraud students."

But Sen. Lamar Alexander (R-TN), chairman of the Senate HELP Committee, said in a statement that the proposed rule sets "important safeguards and clear standards for when a student can file a claim, so taxpayers aren't paying for unreasonable or unsubstantiated claims of fraud."

"Federal law allows students to petition the U.S. Department of Education to have their federal student loans forgiven if they believe their college engaged in misconduct or otherwise misled them," he said. "The Obama Administration went too far in rewriting this provision by setting overly broad and vague standards and as a result, put taxpayers on the hook for too many loans."

Likewise, Steve Gunderson, president and CEO of Career Education Colleges and Universities (formerly the Association of Private Sector Colleges and Universities, or APSCU) said in a statement that the rule was carefully developed and "stands on two strong pillars: protection for all parties involved and respect for due process."

"There should be no doubt that this rule will help students who are victims of fraud find relief, and ensure colleges and universities are part of a fair and objective adjudication process," he said. "Since the concept of the rule was first proposed, our position has remained unchanged: any student at any institution who is a victim of fraud must be protected, and there must be a clear and uniform process for seeking and receiving relief. Earlier iterations of the rule did not respect the letter nor the intent of the law. Carte blanche approval of batches of applications would only serve to cut off access and opportunity for future students. A deliberate and responsive process — as prescribed by this rule — ensures opportunity, access, and justified outcomes for students."

In the coming weeks, NASFAA's policy and federal relations team will publish an article with further analysis and solicit feedback from members. Stay tuned to Today's News for more information.

Publication Date: 7/26/2018

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