Negotiators Enter Tense Second Session on Proposed Borrower Defense Rules

By Allie Bidwell and Brittany Hackett, Communications Staff

The second round of negotiated rulemaking for borrower defense regulations kicked off Wednesday with a visit from the Department of Education’s (ED) Special Master Joseph A. Smith, who discussed some of the challenges his team is facing on issues related to the closure of Corinthian Colleges and its aftermath.

Smith, who was appointed in June 2015, is part of a larger ED plan to assist the students impacted by the closure of Corinthian Colleges and students who believe they were victims of fraud, regardless of whether their school closed. He spoke briefly last month to the committee about the work surrounding borrower defense claims.

During Wednesday’s appearance, Smith said that he believes his team has “done pretty well” in responding to the Corinthian borrowers, noting that an upcoming report on the situation “will show some progress.”

Several negotiators asked Smith whether it would be more effective to allow “group” claims, similar to a class-action lawsuit, rather than requiring each borrower to proactively initiate the claim process. Smith said that for now, it is up to an individual to file a borrower defense claim, which allows for “some flexibility in making the relief fit the situation.” In the meantime, ED will continue to conduct outreach campaigns to Corinthian students who may want to file a claim.

Smith also applauded ED’s recently announced Student Aid Enforcement Unit, calling it “a very good step.”

After Smith’s discussion, the committee turned its attention to the proposed regulations drafted by ED. Student and consumer advocates quickly raised objections to much of the language drafted by ED, with many saying they did not feel the regulations went far enough to protect students from bad actors. There were also concerns about how new regulations for borrower defense to repayment would be applied retroactively from July 1, 2017, the expected date of implementation.

The committee spent a significant amount of time discussing the three alternative standards ED laid out in its proposal under which a borrower could have his or her loans discharged:

  • Obtaining “a favorable judgment in a court of competent jurisdiction against the school;” 
  • Showing a breach of contract by the school; or
  • Showing a “substantial misrepresentation” by the school “that the borrower relied on when the borrower decided to attend, or to continue attending, the school.”

Gail McLarnon – senior director of policy development, analysis, and accreditation service for ED – said that ED's regulatory approach is threefold:

  • Providing relief to borrowers
  • Developing a simple, manageable process
  • Protecting the federal interest

“Part of the reason we’re here as opposed to an act or omission that would give rise to an action at the state level is we want to simplify the process,” McLarnon said. “We want there to be a bright line here. We think these three standards would cover just about anybody that had a defense to repayment. We think our standards are broad and far-reaching.”

Still, members on the committee took issue with the wording of the details of the three standards.

Consumer advocates and those representing students said they had concerns about the first standard requiring the borrower – or a governmental agency on behalf of the borrower – to obtain an official judgment against a school. Several attorneys present expressed concern because they said it’s extremely rare that cases in state court result in a judgment, and that most end in settlements. They argued that borrowers should be able to present other information, such as a settlement or surviving a motion to dismiss.

“It is important to realize just how rarely outside of television dramas judgments happen,” said Mike Firestone, assistant attorney general for the Commonwealth of Massachusetts.

While other committee members said they were concerned that the proposal as it was written would roll back existing rights that borrowers have under state consumer protection laws, McLarnon said ED would still take into consideration evidence brought forward from state attorneys general or other agencies.

“Even though we don’t explicitly state it, we would continue to want to work with state agencies,” McLarnon said. “We’re not discounting that contribution at all here. We value your work highly, and we will continue to use any evidence that you might bring to the process that would help us.”

Throughout the day, negotiators also brought up the proposed two-year statute of limitations that would apply under claims based on breach of contract or substantial misrepresentation. While some members of the committee said they felt the two-year limit was fair, consumer advocates and representatives from state agencies said it seems unfair to limit the window during which a borrower could file a defense to repayment claim when their loans could be collected potentially into perpetuity.

Alyssa Dobson, director of financial aid and scholarships at Slippery Rock University, said that while a two-year limitation seems too narrow to reasonably expect borrowers to gather the necessary evidence and file a claim, having no limitation would be “too broad of a spectrum” to include in the regulation. Dobson said information about defense to repayment could also possibly be included in student loan entrance counseling “to let them know in very simple terms that... this recourse” is available.

Some negotiators also suggested expanding the standards from a breach of contract or significant misrepresentation on the part of the school to include unlawful, unfair, and abusive practices, such as the high-pressure recruitment tactics many students have claimed some for-profit schools use.

“Something I think some schools have gotten very good at is toeing a line and not misrepresenting, but at the same time being so aggressive in their recruitment practices that it should be considered in a defense to repayment claim,” said Maggie Thompson of Generation Progress. “The daily phone calls with messages that are really manipulative and poking at the insecurities of people … those are high-pressure tactics.”

Several former students of for-profit institutions, and other stakeholders within higher education spoke during the public comment section.

Joseph White, who said he graduated from ITT Tech, said he owes more than $165,000 in student loans.

“They were not transparent about my financial aid, and they never told me a portion of my loans were private loans,” he said. “They never provided me with exit counseling before graduation.”

Another student claimed that for-profit institutions are “more than simply bad actors.”

“They have deceived and exploited the students and taxpayers of this nation,” he said.

Overall, the students said they were misled into thinking that the programs they eventually enrolled in would lead to steady jobs with high wages, that the institutions they attended were not truthful about how much their educations would cost, and that in some cases institutions took out loans in their name without approval. The students said that in these cases – where they say it’s clear there has been widespread deception – that ED should take action to provide a class-wide discharge for students who attended these institutions.

Pam Hunt said she felt ED was complicit in the “predatory tactics” of Corinthian Colleges because it had been investigating the for-profit chain long before it took action.

Because of that, she said, “I have had to pay the price in the worst way.”

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 and archive page.


Publication Date: 2/18/2016

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