Borrower Defense Neg Reg Kicks off With Discussion on Role of Consumer Protection

By Allie Bidwell and Brittany Hackett, Communications Staff, and Karen McCarthy, Policy & Federal Relations Staff

The Department of Education (ED) on Tuesday kicked off the negotiated rulemaking, or “neg reg,” session dedicated to borrower defense to repayment regulations, which was spurred by the collapse of the for-profit chain Corinthian Colleges, and subsequent student protests over loans they say they were deceived into taking on. Negotiators over the next three months will attempt to update the borrower defense regulations to better define what may be asserted as a defense to repayment and consequences for borrowers, institutions, and ED.

During his opening remarks, deputy undersecretary at ED Jeff Appel said that while “college remains the best investment students can make in their future,” some schools are failing to provide the education and job training they advertise, leaving students with high amounts of debt and few employment prospects.

In the two decades since borrower defense regulations were originally implemented, there have only been five borrower claims. However, Appel said, last year’s collapse of Corinthian Colleges and the influx of new borrower claims is a timely example of the need for ED to revisit the regulations.

Over the next several months, the negotiating committee selected for this round of negotiated rulemaking will tackle five issues related to borrower defense regulations:

  1. Whether to establish a new standard for the purpose of determining whether a borrower can establish a defense to repayment on a loan based on an act or omission of a school;
  2. The time period of availability for borrower defense to repayment claims;
  3. Developing a regulatory framework for the process of submitting, reviewing, and determining the veracity of borrower defense to repayment claims;
  4. Updating and expanding the existing categories of false certification discharges; and 
  5. Whether to revise the financial responsibility or administrative capability regulations and whether to add disclosure agreements to protect students, taxpayers, and the federal government against potential school liabilities and risks.

On Tuesday, members of the committee focused on the first issue – whether a new standard should be put in place to determine whether a borrower can establish a defense to repayment claim.

Much of the discussion centered on whether federal consumer protection law should be considered in borrower defense claims, as a way to establish a national baseline. Currently, the regulation is wholly dependent on state law. Some members of the committee argued that because state laws vary so widely, having a federal “floor” for consideration would help provide a minimum protection for students in states where the consumer protection laws might not be very generous.

Including federal law, many argued, would not mean that state consumer protection laws would be displaced. Others added that including a federal baseline would be helpful nowadays when many institutions conduct programs online, and questions arise as to which state law should be considered – the student’s home state, or the state where the program is established, for example.

From a financial aid administration perspective, having a federal baseline would also be helpful for financial aid professionals who are put in the position of explaining to students what their rights are, said Alyssa Dobson of Slippery Rock University.

The committee also discussed how a borrower’s injury and the amount of his or her loss should be identified and measured. Aside from discharging student loans students may have taken out after being misled by an institution, members also brought up issues such as whether losses like money spent on child care, transportation, Pell Grant lifetime eligibility, or GI Bill eligibility should be considered. Some committee members brought up the issue of a “moral hazard” – that if an institution indeed misled students, or misrepresented job placement outcomes, for example, but a student went on to be employed in a good career, would he or she still be able to make a borrower defense claim?

Maggie Thompson of Higher Ed, Not Debt, a national campaign run by the Center for American Progress, argued that there is another moral hazard to be considered – making the process too narrow or too complicated, and in effect shutting out students who were legitimately defrauded by their institutions.

Finally, the committee discussed how a new standard should be articulated if it were created, and what violations would justify grounds to file a borrower defense claim. Some administrative errors or violations under Title IV regulations, for example, should not be considered as a gateway to a borrower defense claim because no harm, theoretically, was done to a student, some argued. On the other hand, violations should be considered in a tiered system, where certain violations are automatically considered grounds for a borrower defense claim, and others might require more examination before a decision can be made.

In addition to the borrower defense issues to be covered during this round of neg reg, the negotiating team agreed to add to the agenda four issues proposed by ED that are unrelated to borrower defense, which officials with the Department described as “technical” changes to existing regulations. They include:

  1. Allowing death certificates to be submitted by fax or electronically for the discharge of student loan debt for borrowers or TEACH Grant recipients and allowing verification of death through federal or state databases;
  2. Making a technical correction to current regulations that would include Nurse Faculty Loans as eligible loans for Direct Loan consolidation;
  3. Prohibiting guaranty agencies from capitalizing interest upon loan rehabilitation; and
  4. Specifying within the REPAYE program regulations that a borrower’s monthly payment amount will not be adjusted to account for his or her spouse’s loan debt if only the borrower’s income is used to calculate the payment amount (for example, when the borrower’s tax status is married filed separately and the borrower has no access to the spousal income, as provided in the REPAYE regulations) and to remove an incorrect reference to partial financial hardship.

ED also proposed an additional agenda item prohibiting guaranty agencies from charging collection costs to defaulted borrowers who enter into repayment agreements within 60 days of receiving notice of their default. All negotiators must agree to add items to the agenda and some negotiators requested more time to consider ED’s proposed addition. A decision will be made on Wednesday.

Committee members proposed adding several issues to the agenda as well and they will decide on Wednesday if they will be included on the negotiating agenda. These issues include providing notice to prospective students about schools that are under investigation for fraudulent activity and adjusting regulations surrounding closed-school discharges, among others.

The negotiated rulemaking committee will meet Wednesday and Thursday – when Special Master for Borrower Defense Joe Smith is scheduled to address the committee – of this week before adjourning until the next set of meetings in February. Stay tuned to Today’s News for continuing coverage of this round of neg reg and see coverage of previous sessions on our Negotiated Rulemaking resource page.


Publication Date: 1/13/2016

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