Proposed Rules Would Help Defrauded Student Loan Borrowers

By Allie Bidwell, Communications Staff

The Department of Education (ED) on Monday released a draft version of its much-anticipated rules intended to help defrauded student loan borrowers seeking debt relief.

The proposed rules would provided a clearer and more streamlined path to debt relief for borrowers who were deceived or defrauded by the colleges and universities they attended, and would essentially ban mandatory arbitration clauses that prevent borrowers from taking action against a school in court. Although rules providing a path to debt relief have existed for several years, they were rarely used. The sudden influx of requests for debt relief from former Corinthian Colleges students made it clear the rules needed to be revisited and revised, ED officials said during a press call Monday. The proposed rules are open for public comment for 45 days –– until August 1.

"The Obama administration won't sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag," said Secretary of Education John B. King, Jr., during the press call. "All students who are defrauded deserve an efficient, transparent, and fair path to the relief they are owed, and the schools should be held responsible for their actions."

The proposed rules incorporated several suggestions that a group of stakeholders put forth during three sets of three-day negotiated rulemaking discussions during the last several months. Although the desired outcome of negotiated rulemaking is to end with a draft of proposed rules, ED was tasked with writing the rules after negotiators failed to come to a consensus in March.

While the proposed rules address some of the concerns brought up by negotiators, some student advocates reacted negatively on Monday, saying the rules would not go far enough.

"Make no mistake: the fact that this rule contains any good news is the result of the collective work of debtors who have refused to give up the fight," the Debt Collective said in a statement. "But we continue to believe that the Department is making it far too difficult for students to get the relief they are entitled to by law. The bottom line is that they have given us no reason to trust them."

One concern that was a potential deal breaker for some school and financial aid representatives on the committee was language surrounding repayment rate disclosures. During the negotiated rulemaking sessions, ED's proposal suggested that schools that fail to meet a zero percent threshold for their repayment rates five years after a cohort enters repayment –– meaning that the majority of borrowers in the cohort have not decreased their principal balance in that five-year period –– would have to disclose their repayment rate on any promotional material, and disclose it to all current and prospective students.

School and financial aid representatives said not only would the measurement negatively punish schools whose graduates immediately enroll in graduate school, for example (as those students would not be excluded from the calculation), but the administrative burden would also be immense.

In ED's proposed rules released on Monday, that disclosure provision is limited just to proprietary institutions, and excludes from the calculation borrowers who have one or more loans in military deferment during the last year of the measurement period, and borrowers who have one or more loans under consideration or approved for a total and permanent disability discharge.

The association that represents the majority of proprietary higher education institutions took issue with that provision, and the regulation as a whole. Steve Gunderson, president and CEO of Career Education Colleges and Universities (formerly the Association of Private Sector Colleges and Universities, or APSCU) said in a statement that the proposed rules would "cause millions of students to lose access to higher education."

"The complex and burdensome nature of this regulation will crush career education with financial requirements not imposed on others in higher education – including institutions that have lower graduation rates and higher default rates," Gunderson said. "As the final months of the Administration wind down, the Department is advancing an ideological effort instead of finding ways to work cooperatively with the Congress and higher education stakeholders to advance meaningful reauthorization of Higher Education Act. We hope they will put aside this foolish and costly proposed regulation, but based on their poor track record we doubt they will listen to voices of reason."

The proposed rules would also put into place some measures meant to put schools on the hook for "risky behavior" and to warn students if they have been required to make certain disclosures or provide financial protection through a Letter of Credit, for example. Certain "triggering" events –– such as a major lawsuit from a state or federal government entity, a substantial number of outstanding borrower defense claims, or a school defaulting on its own debt obligations, among other events –– would require institutions to put up funds in the form of a letter of credit amounting to at least 10 percent of the Title IV funds it received in the last year. Those funds would be used to cover the cost of borrower defense and other claims.

Under Secretary of Education Ted Mitchell also said during the press call that the new rules would recognize borrowers with Federal Family Education Loans (FFEL) and Perkins Loans as eligible for debt relief through Direct Consolidation Loans.

Stay tuned to Today's News for more analysis on the proposed borrower defense rules.


Publication Date: 6/14/2016

David S | 6/14/2016 9:31:23 AM

First of all, way to go Allie, reading all 530 pages of the NPRM and reporting on it, all in one day! :)

If the definition of a good compromise is one in which both sides walk away dissatisfied, then the Department has certainly achieved that. The Debt Collective isn't happy because the relief isn't instant and automatic enough, and the for-profits aren't happy because, well, they're being held accountable for the mess they made.

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