ED Makes Few Changes to Borrower Defense Standard and Process in Final Rules

By Karen McCarthy, Policy & Federal Relations Staff

Editor’s Note: This article is the second in a series of three that detail final rules published on November 1, 2016. These articles follow up on a brief overview provided in Today’s News on November 1. The final rules affect several different areas of regulation: borrower defenses to repayment of federal student loans; institutional financial responsibility measures; adjustments to other discharge provisions; and several other miscellaneous items.

This article focuses on the borrower defense federal standard and process. The first article in this series reviewed changes to the standards of financial responsibility which institutions must meet to maintain eligibility to participate in the Title IV programs. The third article will examine the changes to other loan discharges and miscellaneous provisions.

Borrower Defense Standard

The current rules related to borrower defense, in place since 1995 but rarely used, specify that a borrower may assert a defense to repayment based on an act or omission by the school that would give rise to a cause of action under state law. The collapse of Corinthian Colleges in 2015 and the resulting onslaught of borrower defense claims exposed the weaknesses of the current rules, namely that reliance on state law provides uneven relief, is confusing for borrowers, and is difficult to apply with the rise in distance education. In addition, the current rules do not specify any borrower defense process to be followed.

The rules define “borrower defense” as “any act or omission of the school attended by the student that relates to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was provided.” For loans first disbursed prior to July 1, 2017, the act or omission must give rise to cause of action under state law. For loans first disbursed on or after July 1, 2017, the final rules establish a new federal standard of eligibility.

For all loans, a defense to repayment may include amounts owed on a Direct Loan, in whole or in part; and a right to recover amounts previously collected on the Direct Loan, in whole or in part. ED does not have the legal authority to apply the new rules to FFEL Loans, so FFEL borrowers would have to consolidate into the Direct Loan program to participate in the new borrower defense process. To mitigate this, ED will provide FEEL borrowers with a preliminary determination as to whether they would be eligible for relief on their borrower defense claims under the Direct Loan regulations, if they were to consolidate into the Direct Loan program.

The rules specify both a new federal standard for borrower defense claims and processes applicable to both the assertion and resolution of claims. The new federal standard applies only to loans made after July 1, 2017, but the new process would apply to all loans upon the effective date (July 1, 2017), regardless of when the loan was made.

Under the new federal standard, a borrower may assert a defense to repayment under the following conditions and corresponding limitation periods:


Time Limit for Amounts Outstanding

Time Limit for Amounts Previously Collected

Substantial misrepresentation


6 years after the borrower discovers the misrepresentation

Breach of contract


6 years after breach





“Misrepresentation” is defined in 668.71(c); the changes are shown below, marked with strikethrough for deleted text and red for added text):

Any false, erroneous or misleading statement an eligible institution, one of its representatives, or an ineligible institution, organization, or person with whom the eligible institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting or admissions services makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, to a state agency, or to the Secretary. A misleading statement includes any statement that has the likelihood or tendency to deceive mislead under the circumstances. A statement is any communication made in writing, visually, orally, or through other means. Misrepresentation includes the dissemination of a student endorsement or testimonial that a student gives either under duress or because the institution required the student to make such an endorsement or testimonial to participate in a program. Misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.

“Substantial misrepresentation” is defined in 668.71(c) as “Any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person's detriment.” The preamble discussion specifies that in the context of borrower defense, the borrower had to have an actual reasonable reliance on the misrepresentation to his or her detriment, and must prove this reliance.

The preamble discussion reiterates ED’s longstanding position that a misrepresentation does not require knowledge or intent on the part of the institution. ED states that it will continue to operate within a “rule of reasonableness”, will evaluate available evidence of extenuating, mitigating and aggravating factors, and will consider the totality of the circumstances surrounding any misrepresentation for borrower defense determinations. However, institutions are generally responsible for harm to borrowers caused by their misrepresentations, even if they are not intentional.

“Breach of contract” refers to situations where an institution failed to perform its obligations under the terms of a contract with the student. For example, a contract between the school and a borrower may include an enrollment agreement and any school catalogs, bulletins, circulars, student handbooks, or school regulations.

In response to public comments requesting elaboration on how ED will determine that a breach has occurred, ED merely responded by stating that they will rely on general widely-accepted principles of contract law and that determinations of breach of contract are fact-intensive and best made on a case by case basis.

“Judgments” that would meet the federal standard are nondefault, favorable contested judgments against the school based on state or federal law from a court or administrative tribunal of competent jurisdiction for relief. This standard is applied regardless of whether the judgment was obtained by the borrower as an individual or member of a class, or was obtained by a State attorney general (State AG) or other governmental agency.

For individual borrower defense claims, the borrower has the burden of proof. The preponderance of evidence must show that the borrower has a defense that falls under one of these categories. ED believes a “preponderance of evidence” standard is appropriate since it is the typical standard in most civil proceedings and is used by ED in other proceedings concerning borrower debt issues.

The claim must relate to the loan or the school’s provision of educational services. A defense cannot be based on an eligibility or compliance violation by itself, the quality of the education provided, nor academic or disciplinary disputes.

Borrower Defense Process

Current regulations do not specify a process for borrower defense claims. Final rules establish processes for both individual and group claims. ED may also consolidate similar individual claims into the group process.

The individual claim process consists of the following steps:

  1. The borrower applies for relief on a form developed by ED.
  2. ED notifies the school of the claim and provides the school with the opportunity to respond.
  3. If the loan(s) under review are not in default, ED places the loan(s) in administrative forbearance and notifies the borrower. If the loan(s) are in default, ED suspends collection and notifies the borrower.
  4. An ED official reviews the application, requests any necessary documentation from the borrower or school, and issues a decision in writing.
  5. ED may initiate a separate proceeding to collect from the school the amount of relief resulting from the claim.

The group claim process is intended to promote efficiency and expediency by grouping claims with common facts and assertions.

The group claim process consists of the following steps:

  1. ED initiates review of claims asserted by or with regard to a group upon consideration of factors including, but not limited to, the existence of common facts and claims among borrowers that are known to ED, fiscal impact, and the promotion of compliance by the school. ED can identify the group based on individual claims filed or any other source of information. ED can also include people in the group who haven’t filed a borrower defense application.
  2. After identification of the group, ED would designate an ED official to present the claim in the fact-finding process.
  3. ED would notify the school, as practicable, of the basis of the group’s borrower defense, the initiation of the fact-finding process, any procedure by which to request records, and how the school should respond.
  4. A hearing official is designated to review and render a decision on the claim.
  5. If the school is closed and there is no practical ability for ED to recover any losses based on borrower defense claims, resolution of the claim would focus on the arguments and evidence that may be brought by the ED official before a hearing official. In this case, the process doesn’t typically involve the school.
  6. If the school is open, the hearing official reviews evidence presented by the school and the ED official (on behalf of the borrowers in the group), resolves the claim, determines any liability of the school, and issues the decision in writing. Either the school or the ED official can appeal the hearing official’s decision to the Secretary. Although not specified in the final rule, ED states that the process will be structured to provide the substantive and procedural due process protections both borrowers and schools are entitled to under law.

Determination of Borrower Relief

If a claim is approved, the ED official (for individual claims) or hearing official (for group claims) would determine the amount of borrower relief that is appropriate under the circumstances. The amount of relief may include a partial or full discharge and may not exceed the amount of the loan plus other associated costs and fees.

The NPRM included a non-exhaustive list of possible methods to calculate relief, but made significant changes in the final rules in response to public comments that the methods are complicated, confusing, and subject to misinterpretation. Instead, the final rules explicitly state that the factors in determining the amount of relief are the cost of attendance and the value of the education, plus any other relevant factors. In group borrower defense cases against an open school, the burden of proof falls on the school to prove the existence of any offsetting value provided by the education paid for with the loans in question.

The methods of relief calculation are removed in the final rules and replaced with conceptual examples that are intended to serve as guidance as to what types of situations may lead to different types of relief determinations. ED also may issue further guidance on relief as necessary as it receives and evaluates cases under the new federal standard.  

The ED official would notify the borrower of the relief determination and the potential for tax implications. ED would discharge the borrower’s obligation to repay all or part of the loan and associated costs and fees and, if applicable, would reimburse the borrower for amounts already paid or collected.

The ED official or the hearing official, as applicable, would provide further relief as appropriate under the circumstances. That relief would include, but not be limited to, determining that the borrower is not in default on the loan, restoration of Title IV eligibility, and updating reports to consumer reporting agencies to which ED previously made adverse credit reports with regard to the borrower’s Direct Loan.

Recovery From the School

The current regulations provide, in § 685.206(c), that ED may initiate an action to recover from a school whose act or omission resulted in an approved borrower defense the amount of loss incurred by ED for that claim, but may not do so after the end of the record retention period provided under § 685.309(c), which is three years after the end of the award year in which the student last attended the institution.

The final rules remove the three-year limitation on bringing actions against an institution to recover losses incurred from borrower defenses for loans first disbursed on or after July 1, 2017. The preamble discussion states that the three-year record retention time frame pertains to the retention of ‘‘program records’’—records of the determination of eligibility for federal student financial assistance and management of Federal funds provided, which ED believes will rarely, if ever, be needed to address borrower defense claims. ED foresees that borrower defense claims will turn on other evidence— advertising, catalogs, enrollment contracts, recruiting scripts—that have not been and cannot be categorized as ‘‘program records.’’

For loans first disbursed prior to July 1, 2017, the final rules establish that ED may bring action against the institution to recover losses within the later of the three-year record retention period, or the limitation period under state law for the borrower to recover on the relevant cause of action. However, ED may initiate a proceeding against the institution at any time if the institution received notice of the claim before the end of the later of these time periods.

The final rules do not specify procedures that apply when ED seeks to recover losses from institutions. The preamble states that ED is developing procedural rules that will reflect current regulations for audit and program review claims and actions.


Publication Date: 11/17/2016

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