Breaking Down Borrower Defense Regs: New Rules for Certain Loan Discharges, Pre-Arbitration Agreements
By Megan Walter, 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 third in a series of three articles analyzing the rule, and will focus on changes to certain types of loan discharges and miscellaneous provisions. 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 second article in this series focused on changes to borrower defense standard and process.
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.
Closed School Discharge
Under the current rules, ED may grant automatic closed school discharges in the absence of an application from borrowers under certain conditions. The new 2019 rules will end the possibility for an automatic discharge process for closed school discharges for borrowers who attend institutions that close on or after July 1, 2020.
The final rules make an effort to encourage institutions to create well-planned and prudent teach-out plans for their current students before closing the school, as doing so would reduce the total liability that could result from having to reimburse ED for losses due to closed school discharges. The current rules regarding borrower options after their institution closes will be continued, which allow student borrowers the option of applying for the closed school discharge, or participating in the offered teach-out opportunity.
The rules would also extend the enrollment time period for a borrower to qualify for a closed school discharge from 120 days to 180 days before the institution closed.
False Certification Discharge
Borrowers are able to receive a false certification discharge under the final rules if the institution they attended certified Direct Loans for them, even though the borrower was not a high school graduate. In the case that a borrower had submitted a written attestation to the institution that they were a high school graduate, knowing that they were not, the borrower would then not be able to receive a false certification discharge for their federal loans and would be responsible for any loans borrowed.
Direct Subsidized Eligibility & Interest Accrual
The 2019 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 or eliminated, codifying current ED practice with respect to loan discharge and the 150% Subsidized Usage Limit.
Pre-Dispute Arbitration Agreements & Class Action Waivers
The rules would reverse the Obama administration-era rules that prohibit institutions from using pre-dispute arbitration agreements and class action waivers as a condition of enrollment. The new 2019 regulations would again allow institutions to use the agreements and waivers, as long as institutions:
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Provide students plain-language disclosures;
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Place the disclosure on the institutional website alongside admissions and tuition and fees information; and
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Include the disclosure in entrance counseling.
Repayment Rate Disclosures
In the 2016 rules, ED required repayment rate disclosures based on the data provided to ED by institutions through the gainful employment (GE) regulations and on the repayment calculation in those regulations. However, because of ED’s 2019 decision to rescind GE requirements beginning July 1, 2020, the repayment rate disclosure requirement was rescinded for these final rules.
Publication Date: 9/11/2019
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