Borrower Defense to Repayment NPRM: Schools' Use of Dispute Resolution Procedures

By Karen McCarthy, NASFAA Policy & Federal Relations Staff

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.

ED proposes additions to the Direct Loan regulations and to program participation agreement provisions relating to schools’ current use of certain dispute resolution procedures for claims that may form the basis of borrower defenses.

Specifically, for Direct Loan participants, the proposed rules would:

  • Prohibit the use of class action waivers;
  • Bar the use of mandatory predispute arbitration agreements;
  • Require institutions to modify existing arbitration agreements or notify individuals who have already executed arbitration agreements that the institution will not attempt to enforce an existing arbitration agreement in a manner prohibited by the regulations;
  • Require institutions that use arbitration agreements consistent with the regulations to provide ED, in a timely manner, with copies of initial and certain subsequent filings in judicial or arbitral tribunals related to a borrower defense claim, and decisions and awards rendered in those proceedings; and  
  • Prohibit the school from requiring or attempting to require students to exhaust a school’s internal complaint process before contacting or communicating a grievance with the school’s accreditor or government agencies with authority over the school.

ED believes these rules are needed in order to maximize the effectiveness of ED’s proposed processes for submitting and determining the validity of borrower defense claims.

This article is the second in a series of four articles describing the proposed rules. Once published, the other articles in the series will be posted on our Notice of Proposed Rulemaking - 2016 page.


Publication Date: 7/25/2016

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