Breaking Down Borrower Defense Regs: ED Introduces Another Borrower Defense Framework

By Karen McCarthy, NASFAA Policy & Federal Relations Staff

On August 30, the Department of Education (ED) released an unofficial draft of its Institutional Accountability regulations, which include borrower defense to repayment claims, pre-dispute arbitration agreements, and institutional financial responsibility standards. The rule becomes effective July 1, 2020. This is the second in a series of three articles analyzing the rule, and will focus on changes to borrower defense 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.

For background, these issues were previously negotiated under the Obama administration and a final rule was issued in 2016. That rule became effective in 2018 after a court declared invalid two delays issued by ED prior to the rule’s original effective date of July 1, 2017. The newly-issued rule is the result of negotiated rulemaking sessions held in 2017-18, in which negotiators failed to reach consensus, leaving ED to draft its own language.


The history of borrower defense and multiple negotiations of rules has led to three borrower defense periods:

  1. Loans first disbursed prior to July 1, 2017, which are subject to pre-2016 regulations that 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;
  2. Loans first disbursed on or after July 1, 2017 and before July 1, 2020, which are subject to final regulations published on Nov. 1, 2016; and
  3. Loans first disbursed on or after July 1, 2020, which are subject to the 2019 regulations described in this article.

Borrower Defense Standard

For loans first disbursed on or after July 1, 2020, the final rules establish a new federal standard of eligibility for a borrower defense to repayment claim. To qualify, a borrower must establish by a preponderance of the evidence that:

  • The institution at which the borrower enrolled made a misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan, and that directly and clearly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made; and
  • The borrower was financially harmed by the misrepresentation.


“Misrepresentation” is defined as a statement, act, or omission by an eligible school to a borrower that:

  • Is false, misleading, or deceptive; 
  • Was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth; and 
  • Directly and clearly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made.

Evidence that a misrepresentation may have occurred includes, but is not limited to: 

  • Actual licensure passage rates that are different from those in marketing materials, website, and communications; 
  • Actual employment rates materially different from those in the institution’s marketing materials, website, and communications;
  • Institutional selectivity or rankings, student admission profiles, or institutional rankings that are materially different from those in marketing materials, websites, and communications; 
  • The institution does not possess certifications, accreditation, or approvals for programs that it represents that it possesses;
  • Representations regarding the educational resources provided;
  • Representations regarding the transferability of credits that, in fact, do not transfer to other institutions; 
  • Representations regarding the employability or specific earnings of graduates without evidence; 
  • Representations regarding the availability, amount, or nature of financial assistance provided; 
  • Representations regarding the amount, method, or timing of payment of tuition and fees that is materially different from the amount, method, or timing of actual tuition and fees; 
  • Representations regarding whether an institution’s courses or programs are endorsed by employment agencies, industry members, government officials, former students, US armed forces, or others without permission; and 
  • Representations regarding the prerequisites for enrollment in a course or program.

Financial Harm

Financial harm is defined as the amount of monetary loss that a borrower incurs as a consequence of an institution’s misrepresentation, and does not include non-monetary harm. The rules do not consider the act of taking out the Direct Loan to be evidence of financial harm.

Financial harm must not be predominantly due to intervening local, regional, or national economic or labor market conditions and cannot arise from the borrower’s voluntary decision to pursue less than full-time work or to not work, or result from a voluntary change in occupation. 

Evidence of financial harm may include, but is not limited to, the following circumstances:

  • Periods of unemployment upon graduating from the school’s programs that are unrelated to national or local economic recessions;
  • A significant difference between the amount or nature of the tuition and fees that the institution represented to the borrower that the institution would charge or was charging and the actual amount or nature of the tuition and fees charged by the institution;
  • The borrower’s inability to secure employment in the field of study for which the institution expressly guaranteed employment; and
  • The borrower’s inability to complete the program because the institution no longer offers a requirement necessary for completion of the program in which the borrower enrolled and the institution did not provide for an acceptable alternative requirement to enable completion of the program.

ED will determine financial harm based upon individual earnings and circumstances and may also consider evidence of program-level median or mean earnings in determining the amount of borrower relief to which the borrower may be entitled. 

Limitations Period

The limitations period for all claims will be three years from the date that the borrower leaves the school for any reason, whether withdrawal or graduation.

Claim Process

The rules provide only for individual claims; group claims are not permitted. 

The individual claim process consists of the following steps:

  1. The borrower applies for relief on a form developed by ED, including:
    1. Evidence that supports the application;
    2. A statement of financial harm;
    3. Documentation that the borrower actively pursued employment in the field for which the borrower’s education prepared the borrower if the borrower is a recent graduate; 
    4. Whether the borrower was terminated or removed for performance reasons from a position in the field or in a related field for which the borrower’s education prepared the borrower;
    5. Whether the borrower failed to meet other requirements of, or qualifications for, employment in such field for reasons unrelated to the school’s alleged misrepresentation;
    6. A signed waiver that permits the institution that the borrower attended to provide to ED information from the borrower’s records relevant to the defense to repayment claim; 
    7. Statements about other claims filed by the borrower or payments made on the loan by a third party; and
    8. A signed acknowledgment that in the event that the borrower receives a 100 percent discharge of the balance of the loan, the institution may, if allowed or not prohibited by other applicable law, refuse to verify or to provide an official transcript that verifies the borrower’s completion of credits or a credential associated with the discharged loan.
  2. If the loan(s) under review are not in default, ED places the loan(s) in administrative forbearance and notifies the borrower. 
  3. ED will notify the school of the pending application and provide a copy of the borrower’s request and any supporting documents, a copy of any evidence otherwise in the possession of the Secretary, and a waiver signed by the student permitting the institution to provide the Department with items from the student’s education record relevant to the defense to repayment claim to the school, and invite the school to respond and to submit evidence, within no less than 60 days.
  4. Upon receipt of the school’s response, ED will provide the borrower a copy of the school’s submission as well as any evidence otherwise in its possession which was provided to the school, and will give the borrower an opportunity to submit a reply within no less than 60 days.
  5. ED will provide the school a copy of the borrower’s reply.
  6. ED issues a written decision notifying the borrower and the school of the decision, providing the reasons for the decision, and informing the borrower and the school of the relief, if any, that the borrower will receive, and specifying the relief determination.
  7. Borrowers will be notified of incomplete applications that are submitted within the 3-year limitations period.
  8. If ED grants the borrower’s request for relief, both the school and the borrower will be notified of the relief amount, which is limited to the monetary loss that a borrower incurred as a consequence of a misrepresentation.
  9. ED may grant further relief as appropriate, such as removal of default status from the borrower’s record and/or restoration of subsidized loan eligibility.
  10. Decisions are final. Neither borrowers nor institutions may appeal.
  11. ED may initiate a proceeding to require the school whose misrepresentation resulted in the borrower's successful borrower defense to repayment to pay discharged amounts to ED, but will not do so later than 5 years after the discharge decision.


Publication Date: 9/10/2019

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