Negotiators moved forward with discussion on financial responsibility triggers and disclosures related to borrower defense claims on Thursday, and favored language that would significantly limit the use of arbitration in resolving any debt relief claims.
Before diving into discussions about financial responsibility and arbitration clauses, the negotiated rulemaking committee focused on proposed changes to false certification discharges. A borrower may not be required to repay a loan if a school certified loan eligibility for a student who reported not having a high school diploma or its equivalent, or not satisfying an alternative criterion to the high school diploma requirement; or certified loan eligibility after falsifying the student's high school graduation status, or referring the student to a third party who falsified the high school graduation status. Some negotiators were hesitant to include the requirement that the student must have reported not having a high school diploma, because there are various third parties who assist students in completing the FAFSA and those parties may falsely indicate on the FAFSA that the student has a high school diploma, which might prevent a student from receiving a false certification discharge. On the other hand, negotiators representing community colleges want to ensure that their institutions are not held responsible for false certification discharges when they certified the loan in good faith based on the high school completion status reported by the student.
"We have to find a balance here," said Shannon Sheaff, director of financial aid and operations manager for Mojave Community College. "The balance, I think, is in the process and tracking … to spot patterns of abuse."
The group also discussed a list of several triggers that would cause a school to fail the Department of Education's (ED) financial responsibility regulations, and to submit a letter of credit (LOC) for at least 10 percent of the amount of Title IV funds the school received during the most recent award year.
The triggers would be treated as "red flags" that would signal that a school is likely to have to pay borrower defense claims and has compromised ability to pay such claims or continue its participation in the Title IV programs. Two types of triggers are proposed — automatic and discretionary. Automatic triggers — which automatically trigger the LOC requirement — included being sued by one or more state, federal or other oversight agencies, being required by an accrediting agency to submit a teach out plan, being placed on probation or issued a show cause order by an accrediting agency, and having a cohort default rate of 30 percent or higher for the two most recent cohorts.
Discretionary triggers would trigger the LOC requirement only at the discretion of ED and are likely to be considered in combination with one another. Discretionary triggers include citation by a state licensing or authorizing agency for failing state or agency requirements, high annual dropout rates, any event reported to the Securities and Exchange Commission (SEC), and "significant fluctuation" between award years of the amount of Direct Loan or Pell Grant funds that could not be accounted for by changes in the programs.
Financial aid administrators and representatives for institutions brought up concerns about some of the measures, imploring ED officials to make sure schools were not punished for serving traditionally underserved populations.
David Sheridan, director of financial aid at Columbia University's School of International and Public Affairs, said private nonprofit institutions, as well as more selective or "elite" schools, have been criticized for not enrolling enough low-income students, which is commonly measured by the percentage of Pell Grant recipients in a school's population.
Sheridan posed the question of whether a school working to change that — thus enrolling more low-income students and having an influx of Pell Grant funds — would cause an institution to fail that trigger. While other schools might have more nefarious reasons for enrolling a high number of low-income students, schools shouldn't be penalized for expanding access and becoming more inclusive, he said.
In response, ED officials said they wouldn't further define terms such as "significant fluctuation," and would not expand on what would constitute a "high dropout rate." Rather, they said, the situations would be discretionary and would be judged on a case-by-case basis as to whether a LOC would be required.
ED's latest proposal also included certain metrics schools would be required to disclose to current and prospective students under certain circumstances, including a loan repayment rate. The loan repayment rate included in the proposal is calculated differently than the rate included in the College Scorecard.
Repayment rate would be determined on a fiscal year basis by measuring the difference between the original principal balance and the current principal balance (after five years) for each borrower, and express that as a percentage reduction or increase in in the original principal balance. Institutions with repayment rates that do not meet the zero percent threshold would be required to disclose the repayment rate in a number of ways. It would be required, for example, to deliver a notice to enrolled students and receive "electronic or other written acknowledgement" from the student that he or she received the message.
School-based negotiators took issue with several parts of this proposed disclosure. Some raised questions about whether the measure would accurately capture whether an institution is financially responsible — mainly due to the way the rate is calculated — and others brought up concerns about the administrative burden that would come along with the disclosure, the creation of a new definition of repayment rate, as well as the fact that the measure has not yet been vetted.
Christine McGuire, associate vice president for enrollment and student affairs at Boston University, for example, said the repayment rate, as written, wouldn't exclude students who are enrolled in school, or borrowers in a military-related deferment status — except during the last fiscal year of the measurement period.
"I don't think you're measuring what you think you're measuring," she said.
Sheaff of Mojave Community College said the repayment rate is more of a "lagging" indicator in the sense that it would highlight an issue years after it's already happened, while other triggers are more forward-looking.
"I'm not sure this necessarily is the best indicator or the best disclosure measure of financial irresponsibility," Sheaff said. "I think there are a lot of holes here."
Sheaff went on to suggest that rather than using this particular repayment rate, institutions instead make another transparent disclosure, such as linking to the information for their institution's listing on the College Scorecard, in the same way institutions currently display their Net Price Calculators. Sheaff's suggestion garnered support from a number of negotiators, and ED officials said they will hold a caucus with school representatives and any other interested negotiators Friday morning to further discuss how and whether to include the repayment rate disclosure, or whether to move forward with another option.
The committee also moved forward with a proposal to better protect students from mandatory arbitration clauses many for-profit institutions have used — often tucked into the fine print of enrollment agreements — that strip students of their right to take legal action against the institution.
ED previously circulated two options to cut down on the use of forced arbitration clauses — one approach that would allow institutions to continue using the agreements if they met certain requirements, and another that would discontinue the use of the clauses, but allow students to initiate arbitration if they chose to do so. Both would require the institution to allow class action lawsuits.
The first option would require institutions to keep ED informed throughout the process if an arbitration began: sending a copy of each filing by any part "and each order, ruling, decision or other written document produced by the arbitrator" within 10 days, making the proceedings open to the public and recorded and transcribed, among other requirements.
The second option would allow for arbitration only with the student's consent after the claim had been asserted. Negotiators largely favored the second option, but asked for some of the protections from the first — such as requiring any arbitration to be open to the public, recorded, and transcribed — to also be included in the second option.
The committee will begin Friday with Issue 6, which focuses on electronic death certificates.
Publication Date: 3/18/2016