By Jill Desjean, Senior Policy Analyst

The Department of Education (ED) on Tuesday released final rules on borrower defense to repayment (BDR), interest capitalization, Public Service Loan Forgiveness (PSLF), total and permanent disability (TPD) discharge, closed school discharge, and false certification. Effective dates are July 1, 2023, unless otherwise specified.

This article summarizes changes from the Notice of Proposed Rulemaking (NPRM) issued in July.

See NASFAA’s earlier coverage of the proposed rules on BDR, pre-dispute arbitration, and class action waivers; loan discharge for TPD, closed school, and false certification; and PSLF for summaries of major provisions of the rules.

Borrower Defense to Repayment

The borrower defense to repayment rules have an effective date of July 1, 2023. The rules establish a single federal standard for BDR, include a new definition of aggressive and deceptive recruitment — one of five grounds under which a claim could be filed under the new rules — and reinstate a ban on pre-dispute arbitration and class action waivers.

The borrower defense regulations have been in place since 1994 and were rewritten in 2016 and 2019. The current BDR regulatory landscape is a complex patchwork of conditions based on loan disbursement date, meaning that even an individual borrower who attended only one school and proved the school engaged in misconduct may face different discharge criteria for each of their loans based on when they were borrowed.

In drafting its final rules, ED was responsive to public commenters in instances where proposed regulatory language was unclear, and even changed its position in several areas where commenters made persuasive arguments challenging ED’s approach.

However, the final rule largely adheres to the proposed rules issued in July where ED sought to establish a single federal standard for borrower defense that would apply to all new claims submitted on or after July 1, 2023, as well as to pending claims filed prior to that date that have not yet been adjudicated.

The final rule would provide for five grounds under which a claim could be filed:

• Substantial misrepresentation,  

• Substantial omission of fact,  

• Breach of contract,  

• Aggressive and deceptive recruitment, or  

• A federal or state judgment or departmental adverse action against an institution that could give rise to a borrower defense claim.  

One significant change made in response to comments was with respect to concerns that frivolous or unsubstantiated claims could potentially be approved under the draft language. ED added a condition in the final rule that, in order to approve a BDR claim, the department would have to establish that the borrower suffered detriment as a result of the institution’s conduct, and that such detriment would be of a nature that discharge of the student’s debt would be an appropriate remedy.

This change addresses several concerns, including those raised by NASFAA and others, that well-intentioned efforts could be misconstrued as aggressive and deceptive recruitment tactics under the vague definitions in the proposed rules. Adding the requirement that the borrower demonstrate that they both suffered harm and that loan discharge would rectify such harm, limits the possibility that efforts like reminders about financial aid deadlines could be considered aggressive or deceptive tactics and lead to approved claims since such claims would be unlikely to show harm suffered that could be remedied by loan discharge.

In justifying the changes, ED states in the preamble that, “the department seeks to address conduct that falls outside normal and reasonable interactions and causes detriment that is appropriately addressed by discharging a borrower’s outstanding loan balance.”

ED made changes to its language on use of state law standard in approving BDR claims based on a mix of comments, ranging from permitting use of a state law standard at the same time as the federal standard (as opposed to NPRM language that allowed the state standard only upon reconsideration of denied claims), to not using a state law standard at all, to applying the state law standard only to loans that would otherwise quality under the 1994 regulations.

In response, ED changed the final rule to permit violations of state law to be used for reconsideration of denied BDR claims only for loans disbursed prior to 2017. The department supported the decision by reiterating its goal of creating a single federal standard, noting that claims filed for pre-2017 borrowers would currently be subject to the state law standard, but that the number of claims for older loans will continue to decline. The department also revised the state law standard to explicitly state there is no limitation period for filing a claim under the state law standard.

The department made several changes to the regulations related to which entities can request formation of a group claim. Proposed regulations limited requests for group claim formation to state requestors like state attorneys general. Final language updates that definition to include state entities responsible for approving educational institutions in the state, which ED clarified had always been its intention. The new state requestor definition falls under a newly created definition of “third party requestor” which will include state requestors and, now, legal assistance organizations as parties eligible to request consideration of group BDR claims. 

ED had weighed the option of permitting legal assistance organizations to request group claim formation during negotiations but ultimately excluded them from the NPRM. However, ED was persuaded by public commenters and added legal aid organizations, acknowledging that legal aid organizations may have more information and context about a particular institution than state officials do. 

Per the final rule, individual BDR requests as well as requests to consider a group by a third party requestor would now have to be made under penalty of perjury. New language also adds an opportunity for individuals who are part of an approved group claim, to opt out of discharge for the group. 

While proposed language included a rebuttable presumption of full relief with the possibility of partial relief in specific conditions outlined in the NPRM, ED conceded in response to concerns raised by NASFAA and others “that articulating a clear and consistent standard for applying a partial discharge is not feasible.” As such, all approved claims will receive a full discharge, with ED noting that the new language that approved claims must be based on acts or omissions that caused detriment to the borrower and warrant relief in the form of loan discharge will allay concerns about abandoning the option for granting partial relief.

Also new is language explicitly stating ED will not recoup funds from institutions for BDR claims approved prior to July 1, 2023 unless the claim would have been approved under the previous three BDR regulations. This was discussed in negotiations last fall and was addressed in the NPRM preamble, but commenters argued that it merited mention in the regulations themselves — and ED agreed.

ED adds a 90-day period for institutions to respond to group claim requests filed by third party requestors. ED would use responses from institutions in its decision as to whether to form a group. This opportunity would be in addition to what was already in the proposed regulations for institutions to respond to the department on any group after its formation.

ED made several changes in the final rules in response to commenters’ concerns about certain conditions or actions that would give rise to approved borrower defense claims. For instance, ED clarified that favorable judgment against an institution would only be considered as the basis for a BDR claim if the judgment was related to a BDR claim. 

Similarly, with respect to secretarial actions against an institution leading to approval of BDR claims, ED clarified this provision would only encompass actions under the regulations related to fines, limitations, suspensions, and termination proceedings in Part 668 Subpart G; the denial of an institution’s application for recertification; or revoking the institution’s provisional program participation agreement. 

Finally, ED removed language stating that institutional loss of Title IV eligibility due to a high cohort rate (CDR) could be considered by ED in its decision to form a group. The department noted that there is no immediate connection between loss of eligibility for a high CDR and the types of acts or omissions that would give rise to a borrower defense claim. 

ED prohibits participants in the Direct Loan programs from requiring borrowers to sign pre-dispute arbitration agreements and waiving the ability to join class action lawsuits with respect to borrower defense claims. Public comments were limited to primarily ideological disagreements with the ban and questions about ED’s legal authority to ban these practices, and the department made no changes from the proposed regulations on this topic. 

Interest capitalization

ED added two instances of interest capitalization that commenters noted were not included in the NPRM, but should also be exempt from capitalization in keeping with ED’s goal of eliminating all nonstatutory interest capitalization events. Those are when a borrower is repaying loans under the alternative repayment plan, and when a borrower no longer has a partial financial hardship under the Pay As You Earn (PAYE) repayment plan. 

Total and Permanent Disability

ED updated final rules to reflect information from the Social Security Administration that was not available when draft regulations were written. Having since learned that more than 97% of individuals who were assigned a Medical Improvement Possible disability determination continue to meet criteria to qualify as disabled in subsequent eligibility reviews, ED removed from the final rule the requirement that the individual’s entitlement to Social Security Disability Insurance (SSDI) benefits, or eligibility for Supplemental Security Income (SSI) be based on at least one continuation of disability status. 

Closed School Discharge

For closed school discharges, ED clarified in the final rule that borrowers who do not qualify for automatic closed school discharge one year after the school’s closure date, because they continued at another of the same institution’s locations or a teach-out plan, can still receive an automatic closed school discharge if they do not complete those programs. Automatic discharge in those instances would occur one year following the student’s last date of attendance at the other location or teach-out location.  

ED also made an important clarification about when it would use its authority to determine a school’s closure date for closed school discharge purposes. During negotiations and in the proposed rule, language seemed to imply that ED could assign a closed school date to a school that continued to operate in cases where it had ceased to offer programs in which most of their students were enrolled. The final rule notes that ED would only make a determination of school closure date on this basis after the school had closed; not that it would consider an operating school to be closed if it had ceased offering programs where most students were enrolled. Essentially, ED would never be making the determination the school had closed; it would only have the authority to determine the date of the closure. 

False Certification Discharge

Negotiators reached consensus on false certification discharge and ED made no changes from consensus language reflected in the NPRM.

Public Service Loan Forgiveness 

In a win for physicians in Texas and California, ED added to the final rules that individuals who work as contractors for qualifying employers can qualify for PSLF in states where a position cannot be filled by a direct employee of the qualifying employer. This has been a long-standing concern for this population of borrowers because state laws prohibit them from being employed by the nonprofit hospitals where they work, excluding them from PSLF.

ED explored even greater expansions into PSLF eligibility during negotiations and in public comments this summer, requesting feedback on instances where ED could allow private for-profit employers to count as eligible employers, including organizations that employ early childhood education professionals. ED indicated it will release a separate rule at a later date to address this topic due to extensive comments it received from the public. 

ED noted in the final rule that the simplified definition for full-time employment of a minimum average of 30 hours per week (versus the greater of 30 hours or the number the employer considers full-time) for PSLF purposes may be implemented prior to the effective date of July 1, 2023 at the entity’s discretion.  

ED provided new language clarifying how it would count preconsolidation payments toward PSLF when a borrower consolidates their loans, noting that a weighted average of the payments would be used to ensure that borrowers receive neither too much nor too little credit toward PSLF when they consolidate. 

ED clarified that, with respect to lump sum payments counted as qualifying future payments, borrowers must both make the required 120 payments and complete 120 months of service, so in cases where a lump sum payment was counted toward future payments the borrower couldn’t apply for forgiveness at the time the lump sum payment was made but, rather, only upon completion of 120 months of service.

Follow Today’s News for updates and ED guidance as implementation nears. 

Publication Date: 11/2/2022

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