Borrower Defense to Repayment NPRM: Repayment Rate Warnings

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.

The proposed rules would expand the reporting and disclosure requirements under §668.41 to provide that, for any fiscal year in which a for-profit institution has a loan repayment rate that is less than or equal to zero, the school must provide an ED-issued plain language warning to prospective and enrolled students, and place the warning on its website and in all promotional materials and advertisements.

For each fiscal year, ED calculates an institution’s loan repayment rate for the cohort of borrowers whose Direct Loans entered repayment at any time during the fifth fiscal year prior to the most recently completed fiscal year. For example, if ED were to calculate rates in November of 2016, the most recently completed fiscal year would be FY16, Oct. 1, 2015 to Sept. 30, 2016. Five fiscal years prior to FY16 would be FY11, Oct. 1, 2010 and Sept. 30, 2011, so the rate would be calculated on borrowers whose loans entered repayment between Oct. 1, 2010 and Sept. 30, 2011.

ED would calculate the repayment rate by:

  • Determining the original outstanding balance (OOB) of the loans for each of those borrowers.
  • Determining the current outstanding balance (COB) of the loans for each of those borrowers.
  • Calculating the difference between the OOB and the COB of the loans for each of those borrowers and expressing that difference as a percentage reduction of, or an increase in, the OOB.
  • Using zero as the value for any loan on which the borrower defaulted for which there is a percentage reduction of the OOB.
  • On a scale where percentage reductions in principal are positive values and percentage increases in principal are negative values, determining the median value. The median value is the loan repayment rate for that fiscal year.

This repayment rate calculation methodology is the third different methodology that would be in use, differing from both the gainful employment and College Scorecard repayment rates.

ED would not calculate a repayment rate for an institution whose cohort is based on fewer than 10 borrowers. An institution with 10 or more borrowers that receives a failing repayment rate will have the opportunity to appeal its rate if the institution demonstrates that it has a low participation rate under the Direct Loan program by applying, with slight modifications, the participation rate index calculation already in use for cohort default rate purposes.

Borrowers would be excluded from the calculation if:

  • One or more of the borrower’s loans were in a military deferment status during the last fiscal year of the measurement period;
  • One or more of the borrower’s loans are either under consideration by ED, or have been approved, for discharge on the basis of the borrower’s total and permanent disability;
  • The borrower was enrolled in an institution during the last fiscal year of the measurement period; or
  • The borrower died.

An affected institution would be required to provide the loan repayment warning to both enrolled and prospective students by hand-delivering the warning as part of a separate document to the student individually or as part of a group presentation. Alternatively, an institution could send the warning to a student’s primary email address or by another electronic communication method used by the institution for communicating with the student. In all cases, proposed § 668.41(h)(7) would require the institution to ensure that the warning is the only substantive content in the message, unless ED specifies additional, contextual language to be included in the message. Institutions would be required to provide a prospective student with the warning before the student enrolls, registers, or enters into a financial obligation with the institution.

All promotional and advertising materials must prominently include the warning. Promotional materials include, but are not limited to, an institution’s:

  • Website
  • Catalogs
  • Invitations
  • Flyers
  • Billboards
  • Advertising on or through radio, television, print media, social media, or the internet.

All promotional materials, including printed materials, about an institution must be accurate and current at the time they are published, approved by a state agency, or broadcast.

An affected institution would be required to post the warning on the homepage of the institution’s website, in a simple and meaningful manner, within 30 days of the date the institution is informed by ED of its final loan repayment rate. The warning must remain posted to the institution’s website until ED notifies the institution that it is no longer under a requirement to do so as a result of having a loan repayment rate greater than zero percent.

This article is the third​ 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.


Publication Date: 7/26/2016

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