Major Provisions of the Proposed Rules Governing Borrower Defenses and Invitation for Member Comments

By Karen McCarthy, NASFAA Policy & Federal Relations Staff

The Department of Education (ED) has officially released its Notice of Proposed Rulemaking (NPRM) that establishes regulations governing a new federal standard and process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school, closed school loan discharges, revisions to the financial responsibility standards, false certification loan discharges, and circumstances under which guaranty agencies may charge certain fees.

NASFAA provided an initial overview of the proposed rules when they were first released, and this article includes further analysis and a summary of issues where ED is specifically seeking public comment. All comments are due to ED by August 30, 2018, and instructions on how to submit comments are included in the Federal Register. NASFAA also invites members to submit any thoughts or comments to NASFAA for consideration as the staff develops its comments on behalf of the membership. Please submit comments to NASFAA at policy@nasfaa.org by August 10th for full consideration.

Major Provisions of the Proposed Rules Regarding Borrower Defenses

ED's stated purposes of the proposed rules are to:

  • "Provide students with a balanced, meaningful process that relies on a single, Federal standard rather than 50 State standards to ensure that borrower defense to repayment discharges are handled swiftly, carefully, and fairly;

  • Encourage students to seek remedies from institutions that have committed acts or omissions that constitute misrepresentation and cause harm to the student;

  • Ensure that institutions rather than taxpayers bear the burden of billions of dollars in losses from approvals of borrower defense to repayment discharges;

  • Enable institutions to respond to borrower defense to repayment claims and provide evidence to support their response;

  • Discourage institutions from committing fraud or other acts or omissions that constitute misrepresentation or from closing precipitously;

  • Enable the Department to properly evaluate institutional financial risk in order to protect students and taxpayers;

  • Provide students with additional time to qualify for a closed school loan discharge;

  • Address the concerns expressed by negotiators, as well as in a suit filed by an association against the Department, that large financial liabilities resulting from the unclear borrower defense standard in the 2016 final regulations could cripple or force the closure of colleges and universities, even as they produce positive outcomes for students and provide students with accurate and complete information relating to enrollment;

  • Reduce uncertainty about the future of the Federal financial aid system itself due to the strain on the government of large numbers of borrower defense to repayment discharges; and

  • Most of all, to ensure that millions of American students and borrowers are provided with accurate information to inform their enrollment decisions and to ensure that students are not subjected to narrowed educational options as a result of unwarranted school closures."

Basis for Borrower Defense Claim

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."

"More likely than not" is a "preponderance of the evidence" legal standard, or in a layperson's terms, a greater than 50 percent chance. ED's initial proposal during negotiations included a higher standard of evidence, "clear and convincing."

The school must have also made the misrepresentation intentionally or with "reckless disregard for the truth."

A defense cannot be based on an eligibility or compliance violation by itself, the quality of the education provided, nor academic or disciplinary disputes. In addition, the borrower must demonstrate some level of financial harm as a result of the misrepresentation. The amount of demonstrated financial harm may be used in the determination of the amount of loan relief for approved claims.

ED presents two possible eligibility frameworks. The first would only allow "defensive" claims. A borrower would only be eligible to file a borrower defense claim if the loan is in default and ED has initiated a collections action, such as wage garnishment. The second framework would allow "affirmative" claims that would allow borrowers to file claims even if the loan is not in default. These concepts were not discussed at length during negotiations.

ED states their concerns that allowing affirmative claims "could potentially create improper incentives for borrowers with unsubstantiated allegations against schools to seek loan discharges." These perceived incentives may lead to many more claims being filed, creating administrative burden for ED and slowing the processing for substantiated claims. If affirmative claims are allowed, ED is considering requiring a higher standard of evidence, such as "clear and convincing" evidence.

On the other hand, if only defensive claims are allowed, ED acknowledges that borrowers may strategically default to establish their eligibility and this could lead to dire financial consequences if the claim is not ultimately approved.

Deadlines

If only defensive claims are allowed, defaulted borrowers would be required to file a borrower defense claim within the deadline associated with the relevant collections action. These deadlines are 30-65 days from notification of the collections action.

If affirmative claims are allowed, non-defaulted borrowers would be required to file a borrower defense claim within three years of leaving the institution.

Under the proposed rules, ED may initiate a proceeding, in accordance with 34 CFR part 668 subpart G, to require a school to pay ED the amount of discharged loans as a result of borrower defense claims. This proceeding must be initiated by ED within five years of the date of the final determination of the borrower's application for loan discharge.

Process

The process for adjudicating claims, as proposed by ED, would include the following:

  • An opportunity for the institution to receive a copy of the borrower's claim

  • A signed waiver from the borrower allowing the institution to share relevant portions of the borrower's education record with ED in response to a claim

  • Sufficient time for the institution to provide a response and any supporting evidence to ED.  

  • In order to assist ED in quantifying financial harm, the borrower, in submitting a defense to repayment claim, might also be required to submit information about whether, for reasons other than the education received, the borrower has been removed from a job due to on-the-job-performance, disqualified from work in the field for which the borrower trained, or working less than full-time in the chosen field.

  • A provision emphasizing to borrowers submitting claims that if the borrower receives a 100 percent discharge for the loan, the institution has the right to withhold an official transcript for the borrower, to avoid any confusion or surprise that would result from such withholding.  

  • ED will review both the borrower's claim and the institution's response in making a defense to repayment decision.

Partial Relief

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."

Group Discharge

ED's proposal does not allow for ED to initiate discharges for groups of borrowers if there are common facts and claims. In the NPRM, ED states that its proposed uniform standard based on a misrepresentation made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth is dependent upon a fact-specific inquiry, and thus group discharges are not appropriate. the Department does not believe that the group process is appropriate to include in these proposed regulations.  ED also states that a group discharge process "could place an extraordinary burden on both the Department and the taxpayer" and would prevent them from accurately and fairly determining an appropriate loan discharge amount for individual borrowers based on incurred financial harm.

Public Comment Solicitations from ED Related to Borrower Defense

The public is free to comment on any aspect of the proposed rule. Throughout the NPRM, ED solicits comments on these specific issues:

  • Should ED provide borrowers an opportunity to raise defenses to the repayment of Direct Loans only in response to collection actions by ED?

  • Does ED have statutory authority to consider affirmative defenses to the repayment of Direct Loans and what are the risks and benefits of doing so?

  • What types of provisions or requirements could be used to reduce frivolous claims while still ensuring a borrower a fair and meaningful opportunity to seek relief in the event of fraud?

  • Would a clear and convincing evidence standard be appropriate if ED chooses to continue to accept affirmative claims and, if so, whether that clear and convincing standard should apply solely to affirmative claims or to both affirmative and defensive claims?

  • What are some ways to balance the need to serve borrowers with the need to limit unsubstantiated claims and provide an opportunity for the institution to provide evidence in its own defense?

  • What is your opinion on ED's proposal to allow for partial relief, based on the degree of harm suffered by the borrower?

  • Given the complexity of partial relief determinations, what are possible methods for calculating the amount of partial relief?

  • How might ED collect evidence from borrowers and schools, evaluate the merits of a borrower's defense to repayment claim, and render decisions on claims that are submitted affirmatively?

  • What are potential processes that could be used to adjudicate affirmative claims, should the Department accept affirmative claims for some period after a borrower ends enrollment at an institution?

Closed School Loan Discharge

The proposed rules would allow borrowers to qualify for a closed school loan discharge if they withdrew from the institution within 180 days of the school's closure. This expands the time frame from the current 120 days.

ED also proposes to deny a closed school loan discharge to a borrower if the closed school offered an accreditor-approved teach-out program. Current rules deny the discharge only if the student actually completes the teach-out program. ED believes this provision will encourage more schools to offer teach-outs, which it believes are to the benefit of the borrower.

False Certification Discharge

Current rules allow loan discharge when the student's loan eligibility was initially falsely certified. Institutions may only admit students who have received a high school diploma or equivalent or meet one of the authorized alternatives. Therefore, there is a question as to the circumstances under which a student may qualify for a false certification discharge if the student receives a loan and did not meet these academic criteria.

ED believes that in cases when the borrower is unable to obtain an official transcript or diploma from the high school, institutions should be able to rely on an attestation from a borrower that the borrower earned a high school diploma. Thus, ED proposes regulatory language that when a borrower provides an institution an attestation of his or her high school graduation status for purposes of admission to the institution, the borrower may not subsequently qualify for a false certification discharge based on not having a high school diploma.

Financial Responsibility Standards

To be eligible for participation in the Title IV student financial aid programs, an institution must demonstrate both administrative capability and financial responsibility. Violation of the standards under either area can cause an institution to lose its eligibility. This NPRM proposes changes to only the financial responsibility standards.

The proposed rules would establish the conditions or events that have or may have an adverse material effect on an institution's financial condition and which warrant financial protection for ED and expand the types of acceptable financial protection. The proposed rules make no changes to the composite score calculation, but do update the definitions of terms used to calculate the score to conform with changes in accounting standards. The new definitions would have a six-year phase-in to enable ED adequate time to update the Composite Score regulations accordingly through future negotiated rulemaking, as required by statute.

During negotiations, there was a financial responsibility subcommittee consisting of institutional business officers and other accounting professionals. The National Association of College and University Business Officers (NACUBO) will be fully analyzing the proposed financial responsibility rules. NASFAA recommends that institutional business offices carefully review the proposed rules and submit comments as appropriate.

Pre-dispute Arbitration Agreements and Class Action Waivers

The 2016 borrower defense regulations banned the use of mandatory pre-dispute arbitration agreements and class action waivers. After reviewing the issue again, including the current legal environment, ED has decided to take a position that supports the perceived benefits of arbitration (e.g., efficiency, cost savings) and the strong federal policy favoring it. Therefore, the proposed rules do not ban these practices, but instead propose rules that require consumer disclosures aimed at increasing borrower knowledge.

The proposed rules would require schools that require borrowers to sign pre-dispute arbitration agreements or class action waivers as a condition of enrollment to:

  • Make a plain language disclosure of those requirements to prospective and enrolled students on the website where information regarding admissions and tuition and fees is presented; and

  • Include information in the borrower's entrance counseling regarding the school's internal dispute and arbitration processes.

 

Publication Date: 8/2/2018


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