ED Issues Final Rules on Borrower Defense, Closed School Discharges, Total and Permanent Disability Discharges, Interest Capitalization, False Certification, and Public Service Loan Forgiveness

By Maria Carrasco, NASFAA Staff Reporter Hugh T. Ferguson, NASFAA Senior Staff Reporter

The Department of Education (ED) on Monday announced highly anticipated final rules on a number of issues, including the contentious borrower defense to repayment regulations, which aim to create an easier path for borrowers defrauded by their institutions to receive student loan debt relief.

The rules, which will take effect July 1, 2023, were published in the Federal Register on Tuesday. In a press call, Education Secretary Miguel Cardona said these final rules will end the “bureaucratic nightmares of the past” and create a “smoother, faster system for processing claims.”

“​​In recent decades, too many students have been left worse off for having gone to college,” Cardona said during the press call. “Today, we know that many of these students were deceived, they were defrauded, and driven into debt by corporate career schools and for-profit colleges. … Today, we're putting students ahead of special interests. Today, the Biden-Harris team is announcing finalized rules that will streamline access to relief under our borrower defense and other loan discharge programs.”

According to ED, the final rules reflect “extensive stakeholder input” across higher education, including from multiple public hearings, three negotiated rulemaking sessions conducted last fall, and more than 5,000 public comments received this summer.

The final rules were shaped last year by the Affordability and Student Loans negotiated rulemaking committee and follow ED’s proposed regulations that were announced in July. During those negotiated rulemaking sessions, the committee reached consensus on three of the six topics published today: total and permanent disability discharge, eliminating interest capitalization for nonstatutory capitalization events, and false certification discharge.

The committee did not reach consensus on borrower defense, Public Service Loan Forgiveness (PSLF), or closed school discharge.

The proposed regulations reflected consensus language for the topics on which the committee reached consensus. However, the final rules may take into account changes based on the public comment received in response to the proposed rules.

In response to the proposed rule earlier this year, NASFAA President and CEO Justin Draeger said the proposed rules “ensure that student loan processes — both in terms of timeliness and fairness — can match our ideals when it comes to borrower protections.”

“We’re thrilled to see proposed regulations that will make it easier for borrowers with disabilities to receive debt relief,” Draeger said in a statement. “Additionally, reducing the overall cost of federal student loans by eliminating interest capitalization wherever possible will also be welcome news for borrowers. We’re also hopeful that the Department has proposed rules that balance the need for timely adjudication of borrower defense claims against institutions that willfully mislead students, while providing fairness in ensuring schools have an opportunity to respond to those claims.”

Borrower Defense

The borrower defense regulations have been debated for many years. After initially being negotiated under the Obama administration, which published a final rule in 2016, implementation of the regulations was delayed by former Education Secretary Betsy DeVos, who eventually chose to renegotiate the regulations, along with the Obama-era gainful employment rule. In spring 2020, Congress passed the resolution to block DeVos’ rewritten borrower defense regulations, which many, including NASFAA, said would make it harder for borrowers to have their student debt forgiven if they were defrauded by their colleges.

Under the Obama rule, a student needed to show a substantial misrepresentation by the school to receive relief. DeVos’s rule required borrowers to show they suffered financial harm from their institution's misconduct and that the college knowingly made deceptive or false statements.

However, in June 2020, the House failed to override President Donald Trump’s veto of the congressional resolution blocking DeVos’ borrower defense regulations.

Though the Trump administration’s borrower defense rule was implemented in July 2020, soon after the transfer of power the Biden administration announced it would rescind the Trump administration’s formula for calculating only partial relief for borrowers with already approved borrower defense claims and instead use a new approach for granting borrowers full relief. In the same announcement, the Biden administration confirmed it would renegotiate the rule.

During the comment period following ED’s latest proposed borrower defense rule, the Career Education Colleges and Universities (CECU) submitted a 137-page comment, which they say included a detailed legal analysis in which they argue that the rule violates the law by depriving institutions of “essential due process protections.” On Monday, CECU said that given the abbreviated 41-day window between the comment submission deadline and when ED submitted the final rule for interagency review, ED could not have “meaningfully considered thousands of comment submissions.”

“The Department has cut corners in a rush to ram through a punitive borrower defense rule with serious legal and regulatory flaws that could undermine the American education system,” said CECU’s President and CEO Jason Altmire in a statement. “This is yet another example of the Department’s willingness to disregard established processes to pursue a partisan borrower defense agenda that is contrary to the best interests of schools and students. CECU has long supported sensible borrower defense regulations that comply with the law and protect the interests of both students and schools. The new rule fails on both counts.”

The final rule will make it easier for borrowers to file claims for relief as groups — which can be formed by the secretary of education or in response to a request from a third party requester, such as a state attorney general or a nonprofit legal assistance organization — instead of only considering individual applications.

The borrower defense claims may be based on one of five categories, including substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, and judgments and secretarial final actions. In a significant change from the proposed rules, borrowers who file a claim will also be eligible only for full relief of their student loan debt, rather than the possibility of partial discharge.

Borrowers can also ask to have denied claims reconsidered, as long as they have new evidence or are raising an administrative or technical error. Borrowers whose loans were first disbursed prior to July 1, 2017 may also request reconsideration under a state law standard that would have been available to them under older borrower defense regulations, according to ED.

ED also will be able to pursue institutions for the cost of approved claims under the new rules. For loans issued prior to July 1, 2023, ED may pursue recoupment if the claims would have been approved under the borrower defense standards in place at the time the loan was issued.

Prohibiting Mandatory Pre-Dispute Arbitration and Class Action Waivers

Under the final rules, institutions that receive federal student aid will be banned from requiring borrowers to sign mandatory pre-dispute arbitration agreements or to waive their ability to participate in a class-action lawsuit. Institutions also cannot compel students to go through an internal dispute resolution process before contacting the accreditor or government agency about their complaint.

The final rule will require institutions to disclose the use of arbitration and to provide ED arbitral and judicial records connected with any borrower defense claim filed against the institution. This rule was made in order to increase transparency and provide ED with more information to investigate institutions engaged in possible wrongdoing, as well as to provide students the opportunity to file a borrower defense to repayment claim. ED will publish these records in a central database. 

Closed School Discharges

ED states that borrowers are entitled to a discharge if they were unable to complete their program because the college closed. But in the past, too many borrowers who were eligible for a discharge failed to receive one, according to ED, and many of those borrowers then end up delinquent or in default on their loans.

The final rules will expand the number of borrowers who will be eligible for an automatic discharge, and provide relief sooner so that borrowers are at a reduced risk of default, according to ED. 

The rules will provide an automatic discharge one year after a school closes if the borrower does not accept a teach-out, or does not continue their program at another branch of location of the same institution. If a borrower accepts but does not complete a teach-out or the continuation of their program at another branch or location of the institution, they would still qualify for an automatic discharge one year after their final date of attendance.

Additionally, the secretary of education will have flexibility to adjust the closure date if an institution closes but first ceased to provide education in programs in which most borrowers were enrolled. According to ED, this will address past practices ED has observed where a college may try to “drag out its closure to avoid liabilities from closed school discharges.”

Total and Permanent Disability Discharges

The final regulations would allow borrowers who receive additional types of disability review codes from the Social Security Administration (SSA) to qualify for a discharge and include borrowers who later aged into retirement benefits and are no longer classified by one of these codes. Borrowers who have an established onset date of their disability determined by SSA to be at least five years in the past can also establish eligibility. The final rule would also expand these categories to include borrowers whose first continuing disability review is scheduled at three years, a change from the draft rule, which required such a status to have been continued once. The rule would also eliminate the three-year income monitoring requirement that too often caused borrowers to lose their discharges solely because they failed to respond to paperwork requests.

New categories of health care professionals eligible to certify TPD claims are added to the regulations, including physican’s assistants, nurse practitioners, and clinical psychologists.

The rule also includes a technical correction to language stemming from inconsistent language to align with SSA.

Interest Capitalization

ED would eliminate all instances where interest capitalization is not required by statute, such as the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment. According to ED, this would include the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans.

ED noted that the department cannot change interest capitalization requirements in the Higher Education Act (HEA). Two instances in which a borrower would still be subject to interest capitalization include when a borrower exits a period of deferment on an unsubsidized loan, and when a borrower who is repaying loans under the Income-Based Repayment (IBR) plan is determined to no longer have a partial financial hardship, including if they fail to annually recertify income.

NASFAA has supported ED’s move to eliminate interest capitalization.

“We appreciate ED using its regulatory authority to eliminate nonstatutory capitalization events,” NASFAA said in comments on the proposed rule this summer. “While much remains to be done to address the mounting burden of postsecondary student loan debt, the Department has taken a significant step in reducing student loan debt by ensuring students’ loan balances do not continue to grow because of interest accruing on interest as a result of capitalization.”

False Certification

ED did not make any changes to the committee’s consensus language for the final false certification rule. ED adopted the policies in the proposed rule designed to streamline the rules that apply to cases when a college falsely certified a borrower’s eligibility for student loans when, in fact, the student was ineligible.

The rule would also expand the types of allowable documentation and clarifies the applicable dates for a discharge. Additionally the regulations allow for group false certification claims, so that similarly affected borrowers do not need to apply for relief individually when sufficient group evidence exists.

Public Service Loan Forgiveness

On PSLF, ED pointed to last week’s announcement concerning permanent changes being made to the program past the October 31 expiration of the limited waiver.

The final rules codify some, but not all of the provisions of the temporary PSLF waiver that expired on Monday. This leaves an eight-month return to the original PSLF terms and conditions until the new rules become effective on July 1, 2023. Waiver provisions ED has made permanent include the ability for payments made prior to consolidation to count toward PSLF if the borrower consolidates into the Direct Loan program, although the final rule is not as expansive as the waiver since Federal Family Education Loan (FFEL) Program payments made prior to consolidation will not count under the revised regulation.

“Today's historic new rules are the culmination of an extensive effort to review, reevaluate, and reimagine our loan forgiveness programs to better serve borrowers and deliver the relief promised by Congress,” said Under Secretary James Kvaal during a press call. “From day one, the Biden-Harris team has worked hard to better serve borrowers. Already we've approved $38 billion in discharges for 1.7 million people eligible because they were cheated by their colleges work in public service, or who have permanent and total disabilities. Now we're building on those efforts with permanent roles that strengthen accountability, protect students rights, cut red tape, and encourage automatic relief whenever possible.”


Publication Date: 11/1/2022

Peter G | 11/1/2022 4:35:48 PM

Based on prior comments, I think I'm the only one at all worried about False Certification from a community college pov, so I realize I'm yelling into the void here.

After reading through the draft comments yesterday, I will say I found ED's commentary about False Cert to be mostly comforting in terms of their intent and what it is they think they are doing in this space. Is their intent good? Seems to be. Will we stop accepting student self-certification of diploma/ged for most cases as an access issue? Probably not.

But there is a bit of a contradictory two-step here when you piece all the answers together. In many places (e.g. p. 349) ED is suggesting these changes will dramatically expand both awareness and access to the process significantly, and in others they downplay the impact as minimal to insignificant. And while they provide some data on application/usage, there's really no assessment I can see of what share of prior applications would have been impacted by these changes.

I guess in sum, I'm somewhat consoled that the Department isn't going to start approving mountains of these without cause, but I am still very concerned they don't have a good grasp of what sort of volumes they may expect if people (borrowers or advocacy groups) start viewing this as a claim option of last resort, nor what load impacts any increase in load will create for servicers and schools.

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