ED Simplifies Loan Discharges, Issues Prohibition on Certain Contractual Agreements Under New Borrower Defense Rules

By Jill Desjean, Policy & Federal Relations and Policy Staff

Editor’s Note: This article is the third 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 details the changes that will go into effect on July 1, 2017, from miscellaneous provisions and technical adjustments included in the final regulations. The first two articles concerning financial responsibility and borrower defenses may be accessed on our Negotiated Rulemaking page.

Simplifying Certain Types of Loan Discharges
Several changes have been incorporated into the final regulations to simplify the process for obtaining loan discharges other than borrower defense to repayment claims. These include an expansion of the circumstances under which the Department of Education (ED) may grant automatic discharges as well as new required methods of notifying borrowers of their ability, and the process by which, to apply for discharges.

Under existing rules, ED may grant automatic closed school discharges in the absence of an application from borrowers under certain conditions. The new rules add a condition for National Defense Student Loan (NDSL), Perkins Loan, Direct Loan (DL), and Federal Family Education Loan (FFEL) borrowers who attended schools that closed on or after November 1, 2013, and did not re-enroll in a Title IV-eligible institution within three years to also be eligible for closed school discharge without submitting a discharge application.

Borrowers also may qualify for automatic false certification discharge for Direct Loans in other circumstances determined to be eligible by ED, including, but not limited to, evidence that the school has falsified the Satisfactory Academic Progress of its students.

For FFEL borrowers not eligible for automatic closed school discharge, the new rules allow for borrowers to submit a closed school discharge application instead of requiring borrowers to make a written request along with a sworn statement, as was the process in existing regulations. Direct Loan false certification discharges may also now be requested with an application in lieu of the written request and sworn statement.

For NDSL, Perkins, FFEL, and DL borrowers who still must submit closed school discharge applications and whose loans have been placed in collections after failed attempts at contacting them, a provision has been added to provide the borrower with another discharge application and an explanation of the requirements and procedures for obtaining a discharge.

Expanded Documentation Acceptability for Discharge Due to Borrower’s Death
The new rules permit institutions to accept electronic or faxed transmissions of original or certified death certificates as well as to rely upon verification of the borrower's death through Federal or state databases as documentation for borrower death discharge for loans received under the Defense, NDSL, Perkins, FFEL, DL, and TEACH programs. This provision is intended to make the loan discharge process less onerous for families of deceased borrowers and align documentation requirements with more modern methods of information collection.

Restoration of Direct Subsidized Eligibility After Loan Discharge
The final rules absolve borrowers of responsibility for interest that accrued on Direct Subsidized loans in cases where a closed school, false certification, unpaid refund, or defense to repayment discharge results in a remaining subsidized eligibility period greater than zero. In those instances, the Subsidized Usage Period may also be reduced, codifying current ED practice with respect to loan discharge and the 150 percent Subsidized Usage Limit.

Collections and Forbearance Activity for Borrower Defense to Repayment Claims
The new regulations stipulate certain new protections for borrowers making borrower defense to repayment claims. First, guaranty agencies must suspend collection activities upon notification by ED that a borrower has made a borrower defense claim on a FFEL loan that the borrower intends to consolidate into the Direct Loan program. Automatic administrative forbearance for ongoing borrower defense claims is also granted under the updated rules, extended to Direct Loan borrowers for the duration of time required for ED to evaluate the merits of the borrower’s claim.

Prohibition on Certain Contractual Provisions
Institutional eligibility to participate in the Direct Loan program now requires a school's compliance with a new prohibition on predispute agreements and class action bans. Under the new regulations, institutions may not force students to submit to an internal dispute process prior to pursuing complaints with accrediting or government agencies regarding borrower defense claims. Institutions also may not enter into or rely upon predispute arbitration agreements to arbitrate a borrower defense claim. Written agreements with students must now include specific language notifying borrowers of their right to file or participate in class action suits concerning school acts or omissions regarding the making of the Direct Loan or the provision of educational services for which the Direct Loan was obtained. Institutions must also retroactively amend agreements made prior to the effective date of the new regulations to include this specific language.

Technical Changes
The new regulations include minor technical changes to Section 685.209 (Income Contingent Repayment Plans) and center primarily on the REPAYE plan. The most significant change in this section is to 685.209(c)(2)(ii)(B) and applies to married borrowers filing income taxes separately in cases of marital separation or inability to access the spouse’s income information. The new regulations correct eligibility for reduced payments under REPAYE to specify that the borrower and his/her spouse need not both have eligible loans to qualify for reduced payments under REPAYE.

Finally, the regulations revise false certification discharge eligibility language to replace all references to ability to benefit with "high school diploma or its equivalent," reflecting the 2012 elimination of ability to benefit provisions.


Publication Date: 11/18/2016

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