Major Provisions of the Proposed Rules Regarding Borrower Defenses

By Karen McCarthy, Director of Policy Analysis

Early this year, the Department of Education (ED) initiated negotiated rulemaking primarily to establish a new federal standard and process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school. The Notice of Proposed Rulemaking (NPRM) released by ED does this and a whole lot more, including proposed revisions to the financial responsibility standards and additional disclosure requirements for schools.

This article is the first of four that describe the proposed rules. Borrower defenses that may result in loan discharge rather than repayment are outlined in this article. The second article will focus on proposed rules related to arbitration agreements; the third article will explain a new (and different) repayment rate, and the fourth article will address proposed changes to the financial responsibility rules that in part determine institutional eligibility to participate in the Title IV programs. The deadline for commenting on all of these proposed rules is August 1.

Major Provisions of the Proposed Rules Regarding Borrower Defenses

ED’s stated purposes of the proposed rules are to:

  • Protect borrowers from misleading, deceitful, and predatory practices of, and failures to fulfill contractual promises by, institutions;
  • Give borrowers access to consistent, fair, clear, and transparent processes to seek debt relief;
  • Protect taxpayers by requiring financially risky schools to be prepared to take responsibility for losses to the government for discharges of and repayments for federal student loans;
  • Provide due process for borrowers and schools; and
  • Warn students about for-profit schools where the typical student has poor loan repayment outcomes.

Borrower Defense Standard

The current rules related to borrower defense, in place since 1995 but rarely used, specify that a borrower may assert a defense to repayment based on an act or omission by the school that would give rise to a cause of action under state law. The collapse of Corinthian Colleges in 2015 and the resulting onslaught of borrower defense claims exposed the weaknesses of the current rules, namely that reliance on state law provides uneven relief and is difficult to apply with the rise in distance education. In addition, the current rules do not specify any borrower defense process to be followed.

The proposed rules define “borrower defense” as “A defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and a right to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part.”

The proposed rules specify both a new federal standard for borrower defense claims and processes applicable to both the assertion and resolution of claims. The new federal standard would apply to loans made after July 1, 2017, but the new process would apply to all loans upon the effective date (July 1, 2017), regardless of when the loan was made.

Under the new federal standard, a borrower may assert a defense to repayment under the following conditions and corresponding limitation periods:


Time Limit for Amounts Outstanding

Time Limit for Amounts Previously Collected

Substantial misrepresentation


6 years after the borrower discovers the misrepresentation

Breach of contract


6 years after breach





“Misrepresentation” is currently defined in 668.71(c); the proposed changes are shown below, marked with strikethrough for deleted text and red for proposed added text):

Any false, erroneous or misleading statement an eligible institution, one of its representatives, or an ineligible institution, organization, or person with whom the eligible institution has an agreement to provide educational programs, or to provide marketing, advertising, recruiting or admissions services makes directly or indirectly to a student, prospective student or any member of the public, or to an accrediting agency, to a state agency, or to the Secretary. A misleading statement includes any statement that has the likelihood or tendency to deceive mislead under the circumstances. A statement is any communication made in writing, visually, orally, or through other means. Misrepresentation includes the dissemination of a student endorsement or testimonial that a student gives either under duress or because the institution required the student to make such an endorsement or testimonial to participate in a program. Misrepresentation includes any statement that omits information in such a way as to make the statement false, erroneous, or misleading.

“Substantial misrepresentation” is defined in 668.71(c) as “Any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has reasonably relied, to that person's detriment.” The preamble discussion specifies that in the context of borrower defense, the borrower had to have an actual reasonable reliance on the misrepresentation to his or her detriment.

“Breach of contract” refers to situations where an institution failed to perform its obligations under the terms of a contract with the student. For example, a contract between the school and a borrower may include an enrollment agreement and any school catalogs, bulletins, circulars, student handbooks, or school regulations.

“Judgments” that would meet the federal standard are nondefault, favorable contested judgments against the school based on state or federal law from a court or administrative tribunal of competent jurisdiction for relief. This standard is applied regardless of whether the judgment was obtained by the borrower as an individual or member of a class, or was obtained by a State attorney general (State AG) or other governmental agency.

The preamble to the proposed rules specifies that the preponderance of evidence must show that the borrower has a defense that falls under one of these categories and that the claim must relate to the loan or the school’s provision of educational services. A defense cannot be based on an eligibility or compliance violation by itself, the quality of the education provided, nor academic or disciplinary disputes.

Borrower Defense Process

Current regulations do not specify a process for borrower defense claims. Proposed rules establish processes for both individual and group claims. ED may also consolidate similar individual claims into the group process.

The individual claim process consists of the following steps:

  1. The borrower applies for relief on a form developed by ED.
  2. ED notifies the school of the claim and provides the school with the opportunity to respond.
  3. If the loan(s) under review are not in default, ED places the loan(s) in administrative forbearance and notifies the borrower. If the loan(s) are in default, ED suspends collection and notifies the borrower.
  4. An ED official reviews the application, requests any necessary documentation from the borrower or school, and issues a decision in writing.
  5. ED may initiate a separate proceeding to collect from the school the amount of relief resulting from the claim.

The group claim process is intended to promote efficiency and expediency by grouping claims with common facts and assertions.

The group claim process consists of the following steps:

  1. ED initiates review of claims asserted by or with regard to a group upon consideration of factors including, but not limited to, the existence of common facts and claims among borrowers that are known to ED, fiscal impact, and the promotion of compliance by the school. ED can identify the group based on individual claims filed or any other source of information. ED can also include people in the group who haven’t filed a borrower defense application.
  2. After identification of the group, ED would designate an ED official to present the claim in the fact-finding process.
  3. ED would notify the school, as practicable, of the basis of the group’s borrower defense, the initiation of the fact-finding process, any procedure by which to request records, and how the school should respond.
  4. A hearing official is designated to review and render a decision on the claim.
  5. If the school is closed and there is no practical ability for ED to recover any losses based on borrower defense claims, resolution of the claim would focus on the arguments and evidence that may be brought by the ED official before a hearing official. In this case, the process doesn’t typically involve the school.
  6. If the school is open, the hearing official reviews evidence presented by the school and the ED official (on behalf of the borrowers in the group), resolves the claim, determines any liability of the school, and issues the decision in writing. Either the school or the ED official can appeal the hearing official’s decision to the Secretary.

Determination of Borrower Relief

If a claim is approved, the ED official (for individual claims) or hearing official (for group claims) would determine the amount of borrower relief that is appropriate under the circumstances. The amount of relief may include a partial or full discharge and may not exceed the amount of the loan plus other associated costs and fees. A non-exhaustive list of possible methods to calculate relief is in the appendix of the NPRM and includes:

  • The difference between what the borrower paid and what a reasonable borrower would have paid had the school made an accurate representation as to the issue that was the subject of the substantial misrepresentation underlying the borrower defense claim;
  • The difference between the amount of financial charges the borrower could have reasonably believed the school was charging, and the actual amount of financial charges made by the school, for claims regarding the cost of a borrower’s program of study; and
  • The total amount of the borrower’s economic loss, less the value of the benefit, if any, of the education obtained by the borrower.

The ED official would notify the borrower of the relief determination and the potential for tax implications and would provide the borrower an opportunity to opt out of group relief, if applicable. ED would discharge the borrower’s obligation to repay all or part of the loan and associated costs and fees and, if applicable, would reimburse the borrower for amounts already paid or collected.

The ED official or the hearing official, as applicable, would provide further relief as appropriate under the circumstances. That relief would include, but not be limited to, determining that the borrower is not in default on the loan, restoration of Title IV eligibility, and updating reports to consumer reporting agencies to which ED previously made adverse credit reports with regard to the borrower’s Direct Loan.

Recovery From the School

The current regulations provide, in § 685.206(c), that ED may initiate an action to recover from a school whose act or omission resulted in an approved borrower defense the amount of loss incurred by ED for that claim, but may not do so after the end of the record retention period provided under § 685.309(c), which is three years after the end of the award year in which the student last attended the institution.

The proposed rules remove the three-year limitation on bringing actions against an institution to recover losses incurred from borrower defenses. The preamble discussion states that the three-year record retention time frame pertains to the retention of ‘‘program records’’—records of the determination of eligibility for federal student financial assistance and management of Federal funds provided, which ED believes will rarely, if ever, be needed to address borrower defense claims. ED foresees that borrower defense claims will turn on other evidence— advertising, catalogs, enrollment contracts, recruiting scripts—that have not been and cannot be categorized as ‘‘program records.’’

This article is the first in a series of four articles describing the proposed rules. The other articles in the series can be found on our Notice of Proposed Rulemaking - 2016 page. Learn more about the Negotiated Rulemaking at


Publication Date: 7/24/2016

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