Closed School Discharges, Interest Capitalization and Borrower Defense: Neg Reg Continues With Day 2 Agenda
By Owen Daugherty and Hugh T. Ferguson, NASFAA Staff Reporters
In the second day of the Department of Education’s (ED) negotiated rulemaking session committee members worked their way through regulatory language concerning closed school discharges, interest capitalization and borrower defense, marking roughly a quarter of their agenda.
Prior to delving into the agenda of the day, the committee had a discussion on adding advisors. Greg Norwood of Young Invincibles made the request for the addition of an advisory participant in response to the committee not having reached a consensus vote during Monday’s session to add additional committee members.
Ultimately, the committee did not reach consensus on adding any advisors although a majority of members were supportive of adding a for-profit student loan borrower to the committee in a non-voting advisory capacity. In that consensus check, Jessica Barry of The Modern College of Design in Kettering, Ohio, representing proprietary institutions, was the sole opponent to the addition of an advisory position.
The bulk of the morning session was a continuation of yesterday’s conversation on the closed school discharge process where ED brought up language concerning automatic closed school loan discharges and eligibility requirements for students who withdrew from a school before it closed.
One of ED’s proposed changes would standardize the window of eligibility for a loan discharge for students who withdrew prior to a school’s closure to 180 days prior to closure. Several members indicated a lack of support for the language as written, but indicated possible support after further discussion.
ED then went on to propose adding illustrative examples of exceptional circumstances that the secretary of education would consider when students withdrew from a closed school outside of the proposed 180-day window. In offering seven specific examples as to how ED could utilize authority, committee members during the temperature check expressed that they could live with the proposed language. This tentative agreement allowed the committee to move forward.
In the discussion surrounding the definition of comparable programs for the purpose of determining whether a student who attended a closed school but enrolled in another institution would still qualify for a closed school discharge, committee members on the whole expressed concerns over striking a balance between being liberal with discharge benefits while not being harmful to the goal of student completion. Several pointed out that even students who successfully enroll in and complete a comparable program at another school may do so at significant extra cost, given the difficulty of transferring credits and the consequent need to re-take and pay for coursework that doesn’t transfer.
There were also concerns raised over how to achieve equity, particularly given that the closed school discharge process proposed will not be automatic for every borrower, requiring others to be aware of the discharge availability and able to complete the paperwork to receive a discharge, all of which could have harmful effects for at-risk borrowers.
“Figuring out how to interact with a bureaucracy to submit an application is very difficult. You're going to have to go, oftentimes, to a legal services organization to find assistance with this,” said Bethany Lilly of The Arc of the United States which was representing individuals with disabilities. “That is really why I think you're getting the level of pushback you're getting on this, because you are going to miss lots of folks if you do not automate this.”
The afternoon session kicked off with a discussion regarding interest capitalization on student loans, with ED proposing to eliminate capitalization events where it has the authority to do so and is not limited by existing statute.
Instances where capitalization is required in statute include when the borrower exits a deferment period and when a borrower leaves the income-based repayment plan, ED noted in the topic’s issue paper.
Lilly asked if ED would have the ability to apply such a solution retroactively, but was told action would only be prospective.
There was tentative agreement among the negotiators on the benefits of eliminating interest capitalization, with David Tandberg, senior vice president for policy research and strategic initiatives at the State Higher Education Executive Officers Association (SHEEO), pushing to see what additional flexibilities are available to eliminate or reduce interest capitalization where it is statutorily mandated.
“I'd like to consider... what additional steps we might take, what flexibility is statutorily allowed to limit this,” he said. “It’s just such an awful thing to think that a student could be paying on their loans, but the balance is growing larger as they go. It just seems insulting.”
Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center®, asked about consolidation and whether it's an event where interest capitalization occurs, noting it's an instance in which outstanding interest gets rolled into the principal. It represents another opportunity for ED to provide flexibility on this issue, Yu said. An ED official indicated that he is unsure whether this would be possible since consolidation creates a new loan — as opposed to a refinanced loan — consisting of the principal plus accrued interest, which the new lender pays to the old lender to complete the consolidation loan.
All were in tentative agreement on the proposed language put forth by ED to eliminate interest capitalization events where it has the authority to do so.
After a relatively quick discussion on interest capitalization, a majority of the afternoon was spent discussing the topic of borrower defense rules.
Borrower defense has gone through many iterations since its inception, most recently undergoing significant revisions under the previous administration that critics say gutted the rule of its effectiveness. As part of ED’s proposed solutions, the department is seeking to streamline multiple regulatory requirements into a single federal standard that will be easier for borrowers to understand and have clearer rules around what conduct could result in an approved borrower defense to repayment claim, according to the issue paper.
While there was support for a single federal standard, several negotiators pushed for the recognition of the role of states in higher education and the borrower defense process. ED has proposed a reconsideration process for denied borrower defense to repayment claims whereby the borrower could request that ED evaluate their claim under applicable state law.
Negotiator Joseph Sanders, the student loan ombudsman in the Illinois Attorney General’s Office representing state attorneys general, said state attorneys general believe that a state law standard in the first instance is needed, versus only offered in the reconsideration process. He also said he was concerned that having a single federal standard would remove consideration of state law as the current standard, noting that he believes a state law standard affords borrowers a broader array of claims.
Not all were in tentative agreement on this topic.
The negotiators then discussed ED’s proposal that a new, single federal standard would be based on a preponderance of evidence for borrowers who are making claims due to being defrauded by a school.
Sanders Barry were not in agreement on the matter. Sanders again pointed to state law as his preferred standard, saying he has a hard time giving up a better standard for his borrowers. Barry’s disagreement was based on her preference to require “clear and convincing” evidence, a higher standard of proof than the preponderance of evidence.
Negotiators next discussed categories of acts that could lead to a borrower defense claim, with ED proposing to adopt five categories of acts that could lead to successful borrower defense claims, including substantial misrepresentation, omissions, breach of contract, aggressive recruitment, and adjudications, which include court judgments and findings by ED. All but the aggressive recruitment category have been included in previous iterations of regulations.
While there was strong support for the proposal, much of the discussion centered on the lack of a standard definition for aggressive recruitment and the desire for findings from state agencies and governments to be potentially added as a category.
There was not tentative agreement on this portion, with several negotiators issuing thumbs down on the matter.
For the next topic of the day regarding borrower defense, negotiators discussed ED’s proposal to revise the definition of misrepresentation to include job placement rates, program costs, and the tax status of the institution to the list of potential topics where misrepresentation may occur.
A temperature check on this subtopic brought tentative agreement.
The final subtopic of the day regarding borrower defense was on the definition of omissions, in which ED is proposing defining a misleading or deceptive omission by an institution as an act that could lead to a successful borrower defense claim. ED acknowledged that, although omissions are currently included in the misrepresentation definition, officials felt it merited its own separate category, citing as an example that an omission on its own might not stand up to the level of a misrepresentation, but could nonetheless have caused harm to the borrower. Additionally, ED provided examples of omissions that could be grounds for a borrower defense claim.
The group came to a tentative agreement on ED’s proposal. The committee will continue its discussion on borrower defense on day three before moving onto conversations focused on language related to the Public Service Loan Forgiveness (PSLF) program.
Publication Date: 10/6/2021
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